When it finally arrived, the government’s own press notice on the IR35 reform consultation stated that “external research on initial implementation shows that the reform has had relatively little impact on projects or vacancy filling in the public sector.”
First introduced in April 2000, the IR35 rules were reformed in the public sector in the Finance Act 2017, shifting responsibility for determining IR35 status from contractors themselves to the public sector bodies that engaged them.
If the contractor was judged to be inside IR35, it was up to the public sector organisation to deduct Income Tax and National Insurance Contributions before making any payments. And now the government is consulting on implementing this reform in the private sector too.
At Autumn Budget 2017, the chancellor announced that alongside the consultation, independent research would be released showing the impact that these reforms have had on the public sector. This research has now been released and it paints a gloomy picture, contrary to the government’s press release asserting that the impact had been minimal.
Public bodies use contractors for a variety of reasons, but one of the most cited in the research was the need for specialist skills or knowledge that could not be resourced internally for a one-off project. One research interviewee even went as far as saying: “[Off-payroll contractors are] very important … we do depend on them because we have limited revenue and resources at our disposal.”
It is concerning therefore that approximately one third (32 per cent) reported that it had been “more difficult” to fill contractor openings. This means that projects such as TFL’s London Underground repair has been delayed.
Cost of the reforms
Implementing the reforms has meant that great deals of time and money have been invested in human resourcing rather than delivering a service. At a time when public sector finances are still under pressure, it seems strange that the government wants to add to this.
According to the independent research (run by IFF Research but commissioned by HM Revenue & Customs), there has been a financial cost for organisations that have implemented these reforms. Furthermore, over four in ten central bodies (44 per cent) reported an increase in the ongoing administration costs of off-payroll contractors.
Adding to this is the upward pressure that these reforms have had on contractor pay rates. Around 28 per cent of central bodies have had to increase day rates to attract off-payroll contractors. What this means is that public sector organisations such as the NHS are under increasing financial pressure as a result of these reforms.
However, the financial cost is only one side of the coin. The other is the time spent by these organisations implementing these reforms, rather than delivering the service they were designed to do.
Over half (51 per cent) of central bodies found that the off-payroll working reforms were not easy to comply with. Of those that did not find it easy, 43 per cent put that difficulty down to HMRC’s Check Employment Status for Tax (CEST) tool Almost a third (29 per cent) of central bodies said that the guidance that accompanied the legislation was unclear or difficult to understand.
Because of the compliance difficulties – in part caused by HMRC itself introducing a tool that was difficult to understand and not giving enough time before implementing the reforms – public sector organisations have had to increase staff workload.
Six in ten central bodies reported that their staff had spent more time on the administration of off-payroll contractors since the reform. The main benefactor of all this is accounting professionals, who have been brought in to help public sector organisations understand these extremely complex reforms.
The government should take note
One thing is clear from the independent research: contrary to the government’s narrative, the IR35 reforms in the public sector have caused major problems causing delays, increased costs and increased workloads.
If the government was serious about investigating the impact of the reforms on the public sector, before pushing ahead with reforms in the private sector, it must surely be concerned with the research results. At the least, it cannot continue to say that the public-sector reforms have not had a negative impact — when the evidence it commissioned suggests otherwise.
Many small businesses would struggle with the additional costs – in terms of both time and money – to deal with the reforms. It is about time the government stood up and championed business, rather than adding to the UK’s productivity crisis by attacking it.