Off-payroll rules review 'a matter of national security'

A review into rules that require contract workers at government departments like the Ministry of Defence to give assurance about IR35 needs to be run as “a matter of national security.”

This alert by the Association of Independent Professionals and the Self-Employed (IPSE) was issued in response to the MoD being fined £1million for not seeking the assurances due to administrative error.     

Although a similar breach occurred at the Ministry of Health, the ‘destabilising’ effect of the rules is more worrying at the MoD, yet in neither case tax avoidance can be proven, IPSE believes.

“The next government should as a matter of urgency undertake a full review”, said the association, citing the ‘off-payroll’ rules of 2012, introduced in wake of the Ed Lester affair.

“We believe [they] are flawed and…could force contractors out of the public sector altogether, putting at risk projects which are vital to national security.”

Hopes may have been raised last week when the Treasury spoke of a “review” in an announcement about the rules, which IPSE says has “destabilised” the position of contractors.

However, the department was actually referring to an “evaluation” of the rules that it carries out, last year, and this year -- where the non-compliance by the MoD and MoH was found.

Alongside the two ministries, which were fined a total of £1.5million, the Department for Work and Pensions was criticised in the evaluation for its “errors in its reporting”.

Although the DWP escaped a fine (it did not technically breach the Cabinet Office guidance), another government body, UK Export & Finance, isn’t getting to grips with the rules either.

In fact, some “concerns” at how the arm of the business department has been implementing the guidance is serious enough to warrant an independent audit, which it will be subjected to.

All this rule-breaking (potential or proven) doesn’t surprise IPSE. It says the rules were “hastily compiled” as a “knee-jerk reaction” to media pressure; are “unwise and unclear.”    

“The public sector tax rules are a sledge hammer to crack a nut,” added IPSE’s deputy director of policy and external affairs Andy Chamberlain.

“What was designed to prevent clear tax evasion by board level staff has now destabilised the position of specialist contractors and the projects they are working on.

“Government has a responsibility to ensure that the specialists with the right skills...are not driven out of the public sector by these rules. In the case of the Ministry of Defence, this is a matter of national security.”

Despite the warning, the Treasury seems happy with the overall compliance rate of the rules (as it was at the previous evaluation).

“Ninety-five per cent of government departments are broadly following the new rules,” says Danny Alexander, chief secretary to the Treasury.

“It’s heartening that the vast majority of departments are compliant in ensuring that all their contractors are paying the correct amount of tax.”

However the evaluation actually stipulates that of the 2,505 workers that departments applied the rules to, approximately 2,410 provided “satisfactory assurance” that their tax affairs were in order.

As one leading employment status firm and IR35 advisory has pointed out, the term ‘satisfactory assurance’ does not equate to 'getting the rules right' or being outside IR35.

Indeed, the term may cover contractors forced onto the payroll; those who ‘walked’ or got ‘pushed’ or those at departments waiting for proof of assurance, Bauer & Cottrell has said.

Speaking exclusively to Contractor UK more recently, the firm also revealed that at least half of its new enquiries are from public sector contractors needing help with the off-payroll rules.  

This finding -- coupled with the 95% compliance rate found by the Treasury -- suggests that contractors want to "play by the rules" even if they might not know how to without professional advice.  

Speaking on Friday, the legal director of ClearSky Contractor Accounting, Juliet Byrne, added: "The off-payroll rules are a source of confusion and anxiety for public sector contractors".

But the government’s own departments need to be set straight too. According to IPSE, state bodies are mistakenly running the defunct Business Entity Tests on their off-payroll workers.

“It has been widely accepted, even by HMRC, that the BETs are not fit for purpose and are scheduled to be scrapped from April,” reflected Mr Chamberlain. “Despite this, we understand they are still being used by some departments as part of their assurance process.”  

Editor’s Note: Related Reading –

Consultants defended in wake of Newsnight pay probe

Spike in IR35 reviews in wake of NHS ‘off-payroll’ probe

Tax rule for off-payroll staff hasn't stuck, claims Hodge

IR35 assurance demand ‘won’t be made on all contractors’

Public IT contractors cancel interviews as off-payroll rules loom

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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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