IR35 reform: Two years on in the Public Sector

Please note: this blog was written before the IR35 implementation date was delayed to April 2021, however the information contained in this blog is still relevant and helpful.

We are over two years on from the IR35 reform in the Public Sector. It was a major change and it affected a large number of organisations but should we still be seeing businesses who haven’t fully grasped what it means, and the impact on them if they get it wrong?

The reality is that some organisations are listening to incorrect advice, which puts them in a situation where incorrect IR35 determinations are being made and organisations are not demonstrating that they have taken reasonable care in reaching these decisions.

Blanket Inside determinations

One of the reasons for this is that the legislation was changed very close to the go live in 2017 with the addition of the Reasonable Care element, which was introduced to prevent businesses providing blanket determinations on IR35 status to all of their workers. In simple terms, an IR35 determination should be provided on each assignment taking every element of the setup into consideration and not just grouping roles, job types and departments, or in the very worst cases, whole organisations under one determination.

Non-compliant models

There was a well-documented large increase in the amount of contractors moving from a Limited Company to an Umbrella Company who were operating either loan schemes or offshore schemes resulting in the contractor receiving circa 90% of their income. These schemes are illegal and can put everyone in the supply chain at significant risk.

Supply chain risk

In some cases, to gain competitive advantage or perhaps, due to a lack of education within their business on this matter, some agencies and suppliers are ignoring IR35 determinations from clients and continuing to make gross payments to Limited Company contractors. This puts everyone in the supply chain at risk from the worker at the bottom, to the Public Sector end-client at the top.

Lack of client understanding

Some clients haven’t been educated internally on the Off Payroll Legislation or haven’t even heard of it at all. This puts the business at significant risk and also means that they may lose out on engaging with contract workers they need, through the recruitment process being slowed down. In other cases, there are only a few individuals in the organisation who are aware of the rules and there is no business as usual process that has been rolled out across the organisation.

What else did we see happen following the Public Sector IR35 changes?

Mass exodus

The loss of skilled workforce into the Private Sector was one of the reasons Public Sector clients faced disruption as a result of the changes. Contractors with transferable skills who could supply services in either sector left the Public Sector and provided services in the Private Sector where they would not be subject to the new Legislation. This had an impact on Public Sector projects not being delivered on time; the flexible workforce were leaving and it was increasingly more difficult for clients in the Public Sector to attract the right talent who wanted to provide services under the new legislation. This is less likely to happen in 2020 as there isn’t another sector for the contract workforce to move to. However, there are other potential implications to consider that may happen if history is to repeat itself, as it often does.

Rate increases

The Off Payroll Legislation meant that the ‘Fee Payer’ (either the end-client or the agency paying the Limited Company), if determined Inside IR35 and for the rules to apply, had to start deducting Tax and NICs before paying the Limited Company the remaining amount. This meant that a majority of workers, whose assignments were Inside IR35, were seeing a significant reduction in the amount they received. As a result, contractors whose assignments were determined as ‘Inside’ were starting to charge more for delivering the same service, to reduce or remove the financial impact for themselves. This obviously came at a cost to Public Sector clients.

Lack of clarity

This was a major issue with the previous rollout; the legislation itself was changed a couple of weeks before the introduction.

Public Sector Director, Kellie Kwarteng, has been helping Public Sector clients prepare, navigate and implement the Off Payroll Legislation, and concludes:

“Since the implementation of the Off Payroll Legislation into the Public Sector it’s clear that general education within the sector and understanding of how to determine a role is still unclear, and at times, confused.

The use of reasonable care is hard for organisations to execute due to lack of understanding, still resulting in blanket determinations. This has resulted in a lack of available highly skilled talent - mainly within IT / Technical and key programmes across all areas of the Public Sector - resulting in delayed and even cancelled projects coming at a huge cost to the tax payer.

Even more alarming is the increased use of non-compliant payroll solutions. This leaves contractors and end-clients open to potential risk; once again due to limited education around the potential consequences.

My recommendation for any client or contractor would be to check their current payroll set up if working via an Umbrella. For me, the saying, ‘if it’s too good to be true then it probably is’ certainly rings true.”

It’s not all bad news

Businesses and people who have embraced this change taking the time to understand and prepare properly will be winners come April 2020. If a business has a concrete training plan where all of their internal stakeholders involved in engaging with the flexible workforce are trained and educated on the IR35 rules, they can then make accurate and quick decisions on an IR35 status of an assignment when required. They can also look at how they set up the requirement, perhaps engage a service provider to deliver a project or service, and have a SOW (Statement of Work) engagement model available with a contract for services agreed.

Doing these things and being prepared means that the business makes itself more commercially attractive to the best contractors available and as a result will be in a stronger position to attract contractors over their competition. If a contractor has a choice between two assignments, one with an organisation who doesn’t understand the legislation or one with a business who is fully educated and quick to react, it’s obvious which assignment they will favour.

Need help?

Progressive Recruitment, part of the SThree group of companies, has a large percentage of our UK contract business operating in the Public Sector. As a result of this we are one of the few large organisations with PLC status who have been through these changes and have been operating compliantly ever since. We’ve built up extensive knowledge internally, and have the systems, processes and documentation in place to assist both contractors and clients alike.

If you or your business would like to discuss further please contact us, or alternately sign up for one of our Public Sector or Private Sector IR35 webinars. You can also view all available IR35 resources here.

This document/article is for information purposes only, and should not be seen as providing legal or tax advice. SThree and its family of brands, advises clients and contractors to seek independent legal and/or tax advice, where required.