Off-payroll rules review shows 'high' compliance

Limited company contractors in the public sector have largely complied with complex rules designed to ensure that such ‘off-payroll’ workers are meeting their obligations under IR35.

In a review of the 2012 rules and assurance process, the Treasury said yesterday that 1,815 contractors have provided “satisfactory assurance” that their tax affairs were in order.

Only 125 contractors were unable to satisfactorily prove that their tax obligations were being met, resulting in the engagers passing the contractors’ details to the taxman for investigation.

Reflecting on the “high” compliance rate – just six per cent of contractors got referred to HM Revenue & Customs – the Treasury said it showed that the accompanying guidance was “working.”

But an employment status expert says the figures only relate to ‘senior level’ appointments, and only concern such individual contractors who were identified in an initial sampling exercise.

Kate Cottrell, of status advisory Bauer & Cottrell, also believes the guidance could be improved: “It would be useful to have a bit more detail on what constitutes 'satisfactory assurance,'" she said. 

“Based on the initial guidance, 'satisfactory assurance' could mean that all the contractors got put on the payroll, or the relevant departments may still be waiting for evidence of the deemed payment calculations (inside IR35) -- or the figures could include those that simply walked or were pushed. It certainly does not mean that 94% have got it right and are outside IR35.” 

Elsewhere in the Treasury review, the government admits that two departments have been fined for failing to ensure that senior appointments were on-payroll within six months of being engaged, as the guidance stipulates.

In fact, no “exceptional circumstances” were shown by the Department for Environment & Rural Affairs (DEFRA) or the Department for Transport (DfT) to justify why senior officials were still off-payroll seven months after they were engaged.

The DfT was hit with a penalty of £398,500 after two senior officials were exposed as working as contractors at the Directly Operated Railway. Both officials have now been moved onto the payroll.

DEFRA’s penalty was less -- £102,080 -- and was imposed for its breach of the six-month rule covering senior appointments at the Animal Health and Veterinary Laboratories Agency, an arm’s length body.

Ms Cottrell reflected: "Of the two departments that were fined, it reads from the Treasury as if it is OK to be off-payroll for the first six months.

"However, our IR35 contract review work shows that agencies are now asking for assurances from day one of the contracts, irrespective of whether or not these are senior posts.”   

The breaches by the two departments may explain why Danny Alexander, chief secretary to the Treasury, has asked for a full investigation to be carried out into all senior off-payroll appointments in the NHS.

The Secretary State for Health, Jeremy Hunt, will lead the probe to ensure that all employers within the National Health Service are “taking adequate action to prevent possible tax avoidance.”

Mr Alexander said: “The vast majority of off-payroll contracts are in place for legitimate reasons and these workers are playing an important role by satisfying short term needs for specialist advice and services.

“However, it is right that the public sector sets the highest standards in terms of its tax arrangements and that departments continue to assure themselves that all their workers are paying their fair share of tax.”

The subtext is that each government department will retain responsibility for seeking assurance on the tax arrangements of the off-payroll appointees that they, and their arm’s length bodies, make.

Although a second review of the rules will be carried out for the 2013-14 financial year, such engagers will, for now, keep judging whether the evidence contractors present to them is satisfactory to prove that they are IR35-compliant.

“I am pleased that this guidance is working and that compliance has been so high,” said Mr Alexander. “The minority of cases which do not appear to be consistent with the guidance have been passed on to HMRC who will now investigate these.”

The high compliance rate appears to be at odds with claims made by Margaret Hodge, chair of the Public Accounts Committee, who doubted the effectiveness of the rules in July last year, ten months after they were formally introduced.

Last night, Ms Cottrell sounded sympathetic to the PAC chair’s concerns: “It is all still a mess,” the status expert said, referring to ‘inconsistencies’ flagged up at the IR35 Forum in August. “[As] some departments are looking only for a low risk score under the BETs [Business Entity Tests] or an inside-IR35 response.   

“We are also currently working on a number of investigation cases concerning those in the public sector, and now it will be the turn of senior level appointments in the NHS.”

She advised: “My advice to contractors, irrespective of the level of the role, is that where there is public money involved, they should get their contracts and working practices reviewed before they take the work.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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