Public sector IR35 mistakes: why government departments keep fudging the off-payroll rules

Given the significant training, education, and support from HMRC which they have had, I’m probably not the only one surprised that government departments are getting IR35 so very badly wrong, writes off-payroll specialist Rebecca Seeley Harris of ReLegal Consulting.

Human error

And not just one or two departments mind you, but FIVE – and that’s just at the time of writing.

From what I’m currently seeing, and remember I work on the client-side as opposed to the agency or contractor-side, the problem seems to be not with the government departments per se, but with the personnel inside these taxpayer-funded bodies. In that sense, the problem is a human problem, making it potentially transferable to the private sector too.

The root cause, and the conflict within

The root cause is this. The IR35 status decision-making is invariably given to a hiring manager whose agenda (quite understandably) is to make a hire. I find that there is very often conflict between departments within organisations, because HR wants to make the hire and are concerned about the project not being staffed but, the finance department, away from the project coalface, are having to deal with legislative compliance. And so the finance team are much more stringent than the HR team.  

Assuming they are using HMRC’s status-testing tool (as all five departments with millions in IR35 liabilities to HMRC did), the crunch point comes when answering a divisive CEST question on substitution. It’s a question the hiring manager answers in a way designed to get an outside IR35 assessment when, in reality, substitution is probably not a possibility.

Esoteric, questionable substitution arguments

Ominously given the HMRC ‘soft-landing’ period of leniency is ending, I see this issue a lot in both the private and the public sectors. Typically, the hirer uses an esoteric and often questionable argument to show that there is a right to substitution in the contract, often without having checked that the contractual right is actually watertight!

Whether this is a question of “carelessness” or whether employment status is actually just too complicated for anyone other than a professional who dedicates all their time to it, is a question for another article on another day. But their opaqueness and subjectiveness are additional unresolved issues with the off-payroll rules of April 2017 and April 2021.

Lastly, a recommendation…

Organisations shouldn’t have to rely on a professional to make these assessments on a daily basis but, they do need to take training more seriously and appoint a dedicated employment status officer, if their business relies on contractors and doesn’t want to pay countless millions to HMRC.

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Written by Rebecca Seeley Harris

Rebecca is a leading expert in employment status, IR35 and the law involving independent contractors and the self-employed for the purposes of tax and employment law. Rebecca has run her own consultancy for the past 20 years covering all employment status issues such as off-payroll in the private and public sector, otherwise known as IR35, s.44 and any issues affecting the self-employed and personal service companies.
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