From railways to hospitals, how IR35 sent employers off the rails 

We look at the lessons private sector employers could learn about IR35 from public sector organisations.

IR35 can create some tricky dilemmas for employers.

  • Do they force workers who are contractors to go on the payroll?
  • Or do they risk a fine if HMRC deems contractors to be disguised employees?
  • Do they top up pay packets to compensate for the loss of tax breaks when contractors are made employees?
  • Or do they risk an exodus of key workers if they don’t soften the blow?

Private sector firms have a matter of months to wrestle with these issues before they fall under the rules in April 2020.

Here are three cases studies of public sector employers and their different approaches.

NHS ban leads to fewer doctors and nurses

The NHS responded to IR35 with a ban in certain areas on using certain types of contractor.

The Independent Health Professionals Association (IHPA) claimed that the number of self-employed doctors “plummeted by 20,000”. As a result, there were “11,000 fewer doctors” following the application of IR35.

The IHPA thought this was a sledgehammer to crack a nut. “The only IR35 tribunal case concerning a medical doctor that ever occurred was that of a junior doctor assisting in surgery and he was found to be outside IR35, yet 100% of health workers have found themselves blanketed inside the legislation.”

Locum nurses swept up in the changes

Locum nurses were also held to fall within IR35, leading to a significant fall in numbers.

Applying IR35 to locum nurses was contentious. One of the tenets of being inside IR35 is that the organisation exerts significant control over the work of the individual.

“When a new mother begins haemorrhaging after birth, the nurse doesn’t consult a manual to find out what to do. They have to decide which of many options to take, who to call and when to alert the theatres,” says Dave Chaplin of Contractor Calculator.

One of the consequences of the changes is that workers can no longer claim travel expenses. This has further serious impacts in our locum nurses example, as overnight stays now have to be borne by the worker instead of being claimable.  

Contractors express their concern through poll

When IR35 was first introduced, a survey of 500 contractors found 80% were ready to quit the public sector rather than accept tax deductions.

Transport for London tried a ban but had second thoughts…

Transport for London also decided to halt the use of personal services company (PSC) contractors. The policy was revealed in April 2017 and raised many eyebrows in the contractor community.

The ban was aimed at shedding risk to head off problems further down the line. However, it did not stick for long.

After just one month, it was withdrawn.

Project delays as key staff leave

The controversy caused some essential project workers to stop working for TfL.

The repair programme for Bakerloo Underground rolling stock was delayed by five months. “A significant number of critical weld project employees left TfL as a result of IR35,” noted a TfL investment report. There were claims of impacts on much larger projects, such as Crossrail. However, delays here were attributed to testing and commissioning challenges.

BBC presenters make headlines

The BBC suffered from the PR fallout from legal cases around high-profile presenters. There was some questionable advice about why long-serving individuals were encouraged to work through personal services companies, rather than being employed by the Corporation.

Advisory problems

A tribunal found in favour of HMRC over presenter Christa Ackroyd’s tax status, asserting that she was in effect a disguised employee and leaving her with a tax bill of £419,000.

Ackroyd argued that the BBC “encouraged” her to work through a personal services company. The BBC’s argument was that this was “standard industry practice” and that they had been advised to do so by their own tax advisers.

HMRC, backed by the ruling, felt Ackroyd was inside IR35 for a number of reasons – the work was reasonably consistent, it lasted for a reasonable period of time, the BBC had a reasonable level of control over her activities, and there were also clauses preventing Ackroyd from working for anyone else.

It was emphasised in the finding that there was no accusation that Ackroyd had acted dishonestly or was intentionally avoiding tax. The case took five years to resolve, “demonstrating just how complicated and unwieldy this legislation is,” according to David Redfern of DSR Tax Claims.

Future outlook

From the point of view of contractors, they are likely to be looking to rethink who they work for, and large companies and organisations are likely to suffer as their contractors look elsewhere. If they stay with large companies, it is likely that they will have to accept lower fees.

From the organisation’s point of view, large companies are faced either with increasing contractors’ fees to compensate for the change in IR35 rules, or accepting that they will have a smaller pool of talent to make use of. In practice, that might mean allocating work to less qualified people.

The alternative is to put more people on payroll, which organisations are reluctant to do for a number of reasons – principally, that the main reason to use contractors is to maintain a flexible, agile workforce.  

Summing up the experiences of IR35

IPSE champions the interests of self-employed workers. Deputy Director of Policy Andy Chamberlain offers this blunt assessment of IR35:

“Afraid of falling foul of the legislation, many public sector bodies made blanket judgements and simply declared all their contractors ‘inside IR35’. Faced with such treatment, it’s hardly surprising contractors left the sector in droves, causing delays, staff shortages and even the cancellation of major projects.

“The changes to IR35 were a disaster for the NHS and many other bodies across the public sector. The consequences if those changes are extended to the private sector next April, as the government plans, will be even more serious for contractors and the economy.”  

Where is the health sector now?

The debate about whether or not locums are inside or outside IR35 remains unresolved, with a recent HMRC webinar appearing to suggest that they are all caught; to much debate within the contractor industry. With reports of many contractors having exited large-scale projects (such as 30 contractors leaving a £16.5m health service IT project) there is now more awareness within the NHS of the need to assess contractors on a case-by-case basis.

Where is TfL now?

“TfL had to move swiftly to communicate the changes to our workforce of over 1,600 limited company agency workers,” Clive Mills, Recruitment and Redeployment Manager at TfL said earlier this year. The company moved to “analyse the data for critical business roles and successfully implement an independent online tax testing service before the deadline – this service gave us credibility with our Head of Tax, Legal and business managers.”

“Transport for London (TfL) worked hard to swiftly manage the impact of the new IR35 legislation to ensure that projects and services continued with minimal disruption. TfL has developed robust controls and procedures to manage the process on a day to day basis and ensure compliance with the legislation. TfL’s agencies now pay the majority of their workers via PAYE and where it makes sense for TfL to employ people on a permanent and fixed term basis, they are doing so,”  says a TfL spokesman.

Where is the BBC now ?

After the Christa Ackroyd case, the BBC moved 85 workers from contractor status to payroll. Currently, the BBC is agreeing with its presenters that if they do fall within IR35, they will not be financially disadvantaged by the changes.

This might suggest that the BBC is likely to increase their pay accordingly. A number of contractors are now receiving regulation 80 determinations, which enforces payment of PAYE which HMRC believes should have been operated on pay or deemed pay. A section 8 notice for NI is usually issued alongside this.

Read more on tax as part of our #AATPowerUp Tax 2020 campaign for September and October:

Mark Blayney Stuart is Business Journalist of the Year, Wales Media Awards 2017 and Former Head of Research at the Chartered Institute of Marketing.

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