How is IR35 working?

It's been almost four years since IR35 rules were introduced in the public sector, and almost a year since they extended to the private and voluntary sectors but the impact of the changes are still being felt. IR35 queries continue to come up on a weekly basis on the REC legal helpline and our members still reflect on some of the unintended consequences associated with the changes  - the rise of umbrella companies, for example.  

Public sector impact

Last week, the government published research on the long-term effects of the off-payroll working rules in public sector organisations. The study was initially commissioned by HMRC ahead of the off-payroll working reform to the private sector however the second wave of the Covid-19 pandemic meant this was delayed. The sectors surveyed for this work were education, health and social care, and public administration and defence. Below is a summary of the key findings. The research found that Personal Service Companies (PSCs) were the most common way of engaging off-payroll contractors. While the majority of respondents hadn't noticed any change in the number of off-payroll contractors engaged between March 2017 and March 2020, some did mention changing their recruitment strategies to target permanent employees in place of off-payroll contractors. Others moved PSC contractors onto their payroll to avoid having to consider the off-payroll working rules.

Negative feedback about the Check Employment Status for Tax (CEST) tool reduced between 2017 and 2021, suggesting the changes to the tool had been well received - though improvements are still needed, as highlighted in our submission to the House of Lords Finance Bill Sub-Committee last year (more on that below). Around a third of respondents had experienced at least one dispute with a contractor or employment agency regarding their off-payroll status between April 2019 and March 2020.

Interestingly, the public sector experience of using umbrella companies is quite different to the private sector, where engaging an umbrella is much more common. The use of umbrellas in the public sector was rare and hasn't changed much in the last four years - a number of respondents felt that using umbrellas would circumvent the off-payroll working rules and so didn't engage them. You may be aware that the REC recently held two member roundtables with officials from BEIS, HMRC and HMT to discuss the call for evidence on the umbrella company market. The feedback from members was extremely useful and we're feeding that into our response to government - just a reminder that the deadline is Tuesday 22 February - if you haven't already done so, please consider submitting an individual response. The more feedback government gets, the better-informed the policies and regulation will be.

Private sector impact

Last year, the Finance Bill Sub-Committee sought views on the extension of the off-payroll working rules to the private and voluntary sectors. The Committee recently published its findings, following feedback from stakeholders, including the REC.

Their key recommendations are:

• The external research commissioned by HMRC into the implementation and impact of the extension of the off-payroll rules in the private sector should be accelerated and made more comprehensive and its findings published in full.
• The Government must take a more coherent approach to the issue of employment status, which considers both tax and employment rights. It is unfair that individuals are treated as employees for tax purposes but without the rights which are normally associated with employment. To address this, the Government should press ahead with implementing the proposals set out in the 'Taylor Review of Modern Working Practices'.
• The extension of the rules appears to have resulted in an increased use of "rogue" umbrella companies.  

In relation to CEST, the Committee urged HMRC to acknowledge its limits, recognising that the tool "cannot and should not be a substitute for law." They called on HMRC to recognise that the use of other means to assess employment status is both legitimate and reasonable. The Committee was particularly concerned by the 20% “undetermined” rate meaning a significant number of people need additional support to identify their status. Lastly, the absence of questions on mutuality of obligation means that many of those impacted by the off-payroll working rules do not have confidence in the accuracy of its results. The Committee want HMRC to provide more support for those who receive an "undetermined" status and suggested they work with appropriate forums to address the mutuality of obligation question.

The Committee were also concerned about the costs that the new rules imposed on compliant companies - they don't feel HMRC fully appreciates this and want these costs to be revisited as part of HMRC's research into the implementation of the rules. The Committee has requested a response from government no later than 9 March 2022.

We will include a copy of the government's response on our website as soon as it is published.