IR35 for Public Sector Contractors: 4 Things You Need to Know

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On 6th April 2017, new IR35 legislation came into force in the UK for contractors working in the public sector. It has now been more than two years since the changes were introduced, yet IR35 for public sector contractors is still not fully understood by many, partly due to the fact that at no time during these last two years has there been any form of accurate method presented to fully determine IR35 status. This has resulted in a great deal of uncertainty, and in HMRC itself admitting to flaws within the tax system.

As a public sector contractor, here are 4 important things to know about the current state of IR35:

1. Experts believe HMRC’s CEST tool to be flawed

To determine IR35 status, HMRC introduced the Check for Employment Status for Tax (CEST) tool which contractors can access through the online portal. However, the tool has earned a reputation for taking a ‘blanket approach’, encouraging employers to conduct role-based rather than individual-based assessments. Former HMRC inspector Philip Manley actually published a white paper on the matter, branding CEST ‘not fit for purpose’ and claiming that as much as 42% of the results are inaccurate.

2. HMRC believes the CEST tool to be flawed

Yes, really! In a consultation document published by HMRC, it was noted that a ‘considerable proportion’ of public sector contractors experienced difficulties in using the CEST tool and individual assessments. Of course, the Government were eager to downplay these difficulties citing a lack of familiarisation with the system as a primary reason for the low levels of success. However, HMRC has since noted improved functionality, suggesting that, during the early days especially, the CEST tool did indeed feature flaws.

3. HMRC is not always right

In 2018, a UK contractor called Ian Wells faced Her Majesty’s Revenue and Customs in court to fight against a n order to repay £26,000 in unpaid taxes after having been found to be working inside IR35 as what the Government is calling a ‘disguised employee’. Wells, who fully believed that his duties made him fall under the independent contractor category, won the case. A spokesperson for HMRC admitted that they would be carefully considering the outcome before taking any further course of action.

4. HMRC may not be telling the whole story

Recently, HMRC commissioned research into IR35 in the public sector as a precursor for rolling out the legislation into the private sector. Interestingly, a Freedom of Information (FOI) request found that the later drafts of the report were notably missing data that had been included in earlier versions. While it is unclear exactly what information is missing, it has lead many UK contractors to question why significant chunks of data would be removed from the report, and what this data could reflect from IR35 rollout.

What this means for UK Contractors

IR35 in the public sector is alive and kicking, which means that any contractor working independently for public organisations and public bodies must take responsibility for their own tax status, and ensure that they are paying the correct amount in taxes. However, what the above tells us is that determining whether we fall inside or outside IR35 isn’t quite as simple as HMRC will have us believe, and it is imperative that we take the appropriate measures to maintain compliance.

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