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IR35: Are we more concerned about the HMRC tool or how clients are dealing with the changes?

Posted by: Charmaine Kenny 29 Mar 17  | Government |  Public Sector

With 6th April fast approaching, Baltimore Consulting are now reflecting on the outcomes surrounding the changes to IR35.

We’ve spent months waiting for HMRC to release their digital tool, allowing us to confirm the employment status of our contractors for tax purposes. Prior to its release, I think we were all unanimous in our concerns surrounding what this tool would look like and accuracy of the results generated.

That said, there have certainly been teething problems with the lack of clarification around definitions of questions, specifically relating to “Office Holder”, “Substitution” and “Expenses.” After 2 days’ work spent on the phone talking to HMRC, these questions have finally been answered and have allowed us at Baltimore Consulting to work with more accuracy.

HMRC have explained that there will inevitably be further changes to the wording surrounding these questions as there remains a high degree of uncertainty and lots of room for interpretation.

Having accepted these changes and adapted our processes internally, a new concern has arisen for us as an agency; the way in which some of our clients are dealing with these changes.

A large number of Local Authorities have decided to take a blanket approach and capture all interim staff inside IR35.

As previously mentioned, this is very much cause for concern. A large number of Local Authorities that employ senior contract resources or those that possess really niche skillsets such as Adult Social Care, Children Services and SEN, have traditionally struggled finding the right person substantively. In some cases, roles have even been out to advert 3 times, to no avail.

So if they don't have the resources or skills internally to help, what are their options?

They need to get an experienced, professional interim onsite for a certain period of time to assist them with a number of tasks, be it project related, strategic work, commissioning focused and/or operational responsibilities. It then begs the question, why should a Limited Company Contractor be penalised and expected to be PAYE if the role in question is outside on other areas such as supervision, direction & control, mutuality of obligation and substitution?

Clients choosing to take a blanket approach will undoubtedly see a higher volume of interims terminating their contracts to work for other Local Authorities using the tool to determine the status. Loss of skilled individuals will have a catastrophic effect on number of areas within Local Government, such as housing, property, transformation, project management, social care and education.

In addition to this, we’ve seen Local Authorities not only ignore the result of the HMRC tool which clearly declares a contractor outside of scope, but remain adamant that regardless of HMRC’s guidance, they will be deeming the contractor as inside IR35. 

To support their decision, they are offering an increase to the contractors pay rate as a means of accommodating the addition tax contributions. As I write this, I’m still struggling to understand the logic behind it!

This will essentially cost councils more money for a PSC that, in the eyes of HMRC, is actually outside of scope anyway and should be business as usual. Sadly it would appear that the fear of HMRC knocking at the door has seen some Local Authorities make knee jerk decisions that will ultimately hit them financially. With growing concerns around social care and education budgets, I’m sure this is the last thing CEOs will want to see happening.

Example of cost implications:
Project Manager
£500 a day
5 days a week
4 months’ contract
Total cost of contractor pay for duration of the contract: £50,000 (excluding agency fee)

Project Manager
£600 a day (increase of 20%)
5 days a week
4 months’ contract
Total cost of contractor pay for duration of the contract: £60,000 (excluding agency fee)

That’s a massive £10,000 extra spend on one contractor, on one assignment and that’s not even taking extensions or the agency fee into account.

Furthermore, the final legislation includes a new responsibility on public sector bodies to take ‘reasonable care’ when determining the contractor’s tax status. They will consequently become liable for covering taxes and National Insurance Contributions should HMRC decide that ‘reasonable care’ was not taken in making the decision.

We’re here to support both our candidates and clients alike through this period of change. Whilst we will continue to pass on any information we receive from HMRC, the biggest piece of advice we can offer right now would be that all end clients allocate internal resources to ensure they not only use the tool, but use it correctly. 

HMRC have a helpline that is dedicated to IR35 and they are there to assist everyone in both using the tool and understanding the definitions of the questions.

T: 0300 123 2326 (Option 5)

If in doubt call or email HMRC. Make the right decision. Save yourselves both time and money.


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