IR35 reforms and complicated off-payroll rules are costing taxpayers and public sector projects millions of pounds and high-calibre talent. The Freelance Informer asks IR35 experts: what’s it all for?
In a week, the High Speed 2 (HS2) – the non-departmental body in charge of delivering the controversial high-speed rail line between London and Birmingham – and the Home Office have reported millions of pounds of taxpayer funds being redirected to pay off IR35 tax bills.
Introduced in the public sector in 2017, the off-payroll working rules made public bodies responsible for determining the tax status of the contractors they engage – and liable for getting those decisions wrong.
The infrastructure project engaged 339 off-payroll engagements between April 2023 to 31 March 2024 and was one of many departmental and non-departmental government bodies that have struggled with the off-payroll rules. Others include the Ministry of Justice, DEFRA and HM Courts & Tribunal Service, with the combined cost of non-compliance across these bodies exceeding £250m.
This eye-watering tax bill serves as a lesson for other businesses engaging contractors. Given the complexity and the concerns of these rules, it’s crucial that compliance is prioritised.
Seb Maley, Qdos Contractor
The rules have also proven challenging to many businesses and contractors since they were rolled out in the private sector in 2021, with many bodies relying on HMRC’s Check Employment Status for Tax (CEST) tool to determine the IR35 status of contractors.
Qdos CEO, Seb Maley, said the body’s “repeated failures” raise serious questions about HMRC’s IR35 tool, CEST, used to determine the IR35 status of contractors. Maley said it is no surprise HS2 relied on contractors – but clearly it made mistakes when assessing contractors’ IR35 status.
“Time and time again, CEST is at the heart of incorrect IR35 assessments,” said Maley, whose business offers worker status and Off-payroll assessments.
“This eye-watering tax bill serves as a lesson for other businesses engaging contractors. Given the complexity and the concerns of these rules, it’s crucial that compliance is prioritised,” he said.
Rachel Reeves is seeking to plug a £22bn gap in the public purse. She could start by looking at the IR35 Reforms, which are a textbook example of misguided policy implementation worthy of a tax policy Darwin award.
Dave Chaplin, IR35 Shield
IR35 bills are counterproductive and costly
Dave Chaplin, CEO and founder of IR35 compliance firm IR35 Shield told The Freelance Informer, “HS2’s latest annual accounts have revealed a final IR35 bill of £6.2m, highlighting the circular and counterproductive nature of Off-payroll legislation in the public sector.”
He continued, “Firstly, we’re witnessing a bizarre money-go-round. HS2, funded by the government, pays £6.2m to HMRC, which goes to the Treasury, only for the Treasury to then fund HS2 with monies including this £6.2m. It’s a bureaucratic circus that serves no real purpose.”
With only 5% of contractors deemed outside IR35, we’re likely to see top talent blackball the HS2 project, leading to higher cost alternatives.
Dave Chaplin, IR35 Shield
According to the contractor sector and IR35 reforms expert, the compliance efforts themselves are a net loss for the Treasury. Chaplin said HMRC caseworkers’ salaries result in only about a third returning as tax revenue.
“Add to this the increased costs from pushing contractors onto the payroll and the use of consultancies, and we’re looking at a significant net loss for the public purse,” said Chaplin, adding the human cost is equally concerning.
“With only 5% of contractors deemed outside IR35, we’re likely to see top talent blackball the HS2 project, leading to higher cost alternatives,” said Chaplin.
Knowingly, HMRC and public sector accounts were aware of the inconsistency and faulty HMRC CEST tool from previous court cases involving other departments and contractors. This is what Chaplin says is “most alarming” given HS2’s reliance on HMRC’s CEST tool, which has “clearly failed them”.
Chaplin suggested that many private sector firms abandoned CEST long ago due to its “well-documented shortcomings.”
Arguably, off-payroll in the public sector is, in essence, a “loss-making exercise for the Treasury.” Chaplin told The Freelance Informer.
“The HS2 accounts prove it, as did the Home Office accounts published earlier in the month. The private sector is equally struggling. Rachel Reeves is seeking to plug a £22bn gap in the public purse. She could start by looking at the IR35 Reforms, which are a textbook example of misguided policy implementation worthy of a tax policy Darwin award,” he said.
Is getting rid of the middlemen the answer?
For the Home Office, engaging a consultancy will often lead to higher day rates because there is another middleman involved adding on margins. For example, instead of hiring a contractor directly, by going via an agency, that supplies the worker to a consultancy, the rates could easily double, according to Chaplin.
“Suppose the consultancy is charging double, it might be that a consultancy employee is used, who is not paid as much as the contractor. The profit then made sits with the consultancy – but that does not mean it is taxed in the UK. The consultancy could be global.”
Chaplin said the simple observation is that by putting more layers into the supply chain to hire a contractor, the costs will be higher to the Home Office, or any other public sector department, which will “eat into the extra tax paid by the contractor.”
He suggests this scenario as an example, “Suppose the extra tax is around 15%, that won’t offset almost double the cost of adding the additional layers.”
When it comes to attracting the best talent, the Home Office, for example, could be losing out. Chaplin said if the Home Office, for example, widens its scope to engage directly with contractors, without using consultancies, it would undoubtably get access to a larger talent pool.
“The best contractors are in high demand and can dictate their pay rates. Consultancies will hire contractors too, but then margins will be added on top.
“Cut out the middleman is the oldest trick the business book. But, the IR35 Reforms have resulted in more middlemen and more cost,” said Chaplin.
