Government clamps down on contractors, threatens major tax consequences

Note; this post is not just for public sector procurement geeks  - it is relevant to anyone with an interest in temporary / contingent labour, public  or private sector, or anyone who works as a contractor....

I’ve found another Procurement Policy Notice on the UK Cabinet Office website – how exciting, two in a week! After the update on negotiations around changes to EU procurement regulations, we now have something of more immediate relevance to procurement people – “Tax Arrangements of Public Appointees”.  More interesting than it sounds...

It is in response to the furore a while back lots of senior people were found to be working in long-term public sector roles, but on a day rate basis and through their own or other private service companies. They therefore avoid paying National Insurance, and arguably get some tax advantages (although the media seemed to forget that you still get taxed, whether you take money out of your company via salary or dividends).

Of course this has been going on for years, and as we pointed out, many public sector bodies actually forced contractors into working through companies rather than as employees or sole traders. But once a few egregious examples hit the press, then of course "something had to be done”.  And this document is the guidance to what is being done – which really, is in the main pointing out regulations that were already in place.

It’s a good document actually, and the Revenue and Customers guidance it links to  - the “Business entity test” which gives scenarios to help determine the employment status of workers  – is one of the best and clearest bits of guidance I’ve ever seen from Government. It is really useful to anyone involved in procurement and management of “contingent labour”,  public or private sector. I don’t say this often, but well done HMRC.

Back to the Policy Note. There are a number of steps to consider for any worker you are employing in that contingent / temporary labour bracket. Firstly, if the worker is engaged directly, are they employed or self-employed?  If self-employed, the employer should confirm that the worker is registered to pay tax. If they’re employed, then clearly they should be on the payroll.

If they are employed through a firm and they’re on the payroll of that firm (a Deloitte consultant, for instance), then there is no problem.

The tricky area is when they are employed through a service company – either their own or a separate firm. That’s when IR35 becomes the key issue. IR35 is the tax regulation that determines whether someone really should be classified as an employee, and pay tax accordingly. This Policy Note suggests that people classified as “low risk” using the HMRC assessment methodology (within the impressive document I linked to above) are OK, but higher risk people will need to provide other assurance or make a payment to HMRC that equates to the tax and NI they “should” have paid as employees. And it looks like it is the worker who is liable for employer NI as well as their own in that case!

The tests for IR35 are things like whether you can substitute someone else for you to do the work; are you controlled by the employer in terms of hours worked, location etc; and do you have other people working for you. Again, the HMRC guidance gives some good examples of how this applies.

So the interesting thing here is this.  There are, I am pretty sure,  thousands of people working around the public sector who would fall foul of IR35 if anyone looked carefully. Thousands, I promise you. But I fully expect the employing organisations to largely ignore this policy note, because some areas of their business – often key ones – will grind to a halt if they lost their key contractors.

As the employers often use an intermediate service company – Capita, Commensura, De Poel etc – they will probably just say, “Not my problem”.  But my understanding is that IR35 applies even if there are six intermediate companies – if you are effectively  working for the Department of Administrative Affairs in your day to day activities, you’re caught under IR35, whatever other corporate layers sit between you and the Department. And the risk lies with the individual, not the Department or other public body.

So if you’re a contractor, and you’re going into the same public sector organisation, day after day, doing a job that is effectively that of an employed person,* then this note has made it very clear – you’re liable for a whole heap of tax and two lots of NI if the taxman catches up with you.  I can see some interesting conversations shortly – if of course this Note is actually read by the right people**!

In part 2 we'll look at some of the possible consequences of this.

*because of course they can’t find an HEO on a £30K a year salary with your skills, which is why they pay you £400-800 a day as a contractor

 ** If you are a contractor reading this, please circulate it to your circle of contractor friends – I suggest they need to read the Policy Note carefully

Voices (5)

  1. Simon McCartney:

    I am an IT contractor working through a service company (we are already well aware of the issues you have brought up, but its nice to see that people at the other end of the contract wondering how this is going to pan out) and I have already seen a move for people to simply avoid Public Sector contracts which can only mean everyone losing out. Organisations missing out on the highly skilled contractors and thus relying on cheaper, out sourced labor which inevitably leads to quality suffering.

    More information from the “other side” can be found here:

    http://forums.contractoruk.com/business-contracts/81072-public-sector-contracting.html

  2. Final Furlong:

    I think you will find that there are many interims in Somerset, many of whom, like Ms Corbett, have been there for quite some time. This is not usual. It’s also not unusual to see teams of consultants from various firms occupying themselves for similar periods of time, but with a much higher burn rate. Systemic.

  3. Dave Orr:

    What about Local Government?

    In Somerset County Council (SCC), the Conservative administration hires consultants through Reeds Employment Agency (procured via SW1). This is in spite of SW1 being contracted to drive process chnage as well as procurement savings (via expensive SAP).

    The Contract Director Claire Corbett hired to drive through “commissioning” is paid £1,000 per day in this arrangement and on enquiry, SCC claims that there is no IR35 issue as they are using Reeds Employment Agency.

    http://www.thisissomerset.co.uk/New-director-paid-pound-1-000-day-save-money/story-13611885-detail/story.html

    How would we know whether Reeds is paying through a service company and whether IR35 applies?

    Are Somerset County Council responsible still for IR35 assessment?

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