HMRC claims impact of IR35 reform in public sector was ‘minimal’

New research into public sector reform downplays contractors' experience

Despite government department’s having been hit with £263m worth of IR35 bills for non-compliance, research into public sector IR35 reform commissioned by HMRC claims the impact of the changes were ‘minimal’.

Reform to the off-payroll working rules was rolled out in the public sector in 2017, shifting the responsibility for determining IR35 status from the contractor to the end-client. Similar changes came into effect in the private sector last year, impacting medium and large businesses.

HMRC commissioned IFF Research and Frontier Economics to look into the long-term impact of IR35 reform on public bodies. The findings were due to be published ahead of the changes being rolled out in the private sector, but the second-wave of Covid delayed this.
 

7 in 10 say no change in contractors operating outside IR35

The study found that since the reform, 62.5% of central government bodies and individual public authority sites said there had been no change in the number of contractors between 2017 and 2020 working outside IR35.

The report states that the majority of public sector bodies (88.5%) assessed contracts on a case-by-case basis and with a quarter (23.5%) of contractors, on average, classed as inside IR35.

It also claimed that little over one in ten determined 100% of their contractor workforce inside the legislation. 

Just 1% said to have blanket-assessed contractors

According to the survey, just one per cent of public sector organisations carried out blanket IR35 determinations, which are non-compliant given they lack reasonable care. This figure is at odds with Qdos’ and many other experts’ findings. 

With regards to complying with the new rules, the study found that almost half (46%) claimed it was straightforward. This was largely due to HMRC’s CEST tool which apparently made IR35 assessments “quick and easy”.

“There was overall less negative feedback related to CEST in 2021 compared with the research in 2017, suggesting improvements to the tool had been well received,” the report went on to state.

Half did not seek support to ensure IR35 compliance 

However, it also highlighted that 49 per cent of those polled did not use any information, whether from HMRC or third parties, to ensure they were IR35 compliant. 

But given another recently published review, carried out by the National Audit Office (NAO), highlighted the £263m worth of IR35 bills issued to government departments, this lack of specialist support has been costly. 
 

Report downplays true impact of IR35 reform 

The feeling is that this report downplays the true impact of reform in the public sector, which resulted in skills shortages as organisations struggled to attract contractors, many of whom were unfairly placed inside IR35 or expected to work via umbrella companies. 

For example, research conducted by trade bodies IPSE and CIPD into the public sector reforms found that 51 per cent of hiring managers had lost skilled contractors as a direct result of the changes. And a further seven in 10 (majority of whom worked in the NHS Trusts) said they were struggling to hold on to their contractors.

As our CEO, Seb Maley, explained to The Register, this study should be taken “with a pinch of salt”, given it doesn’t take into account contractors’ views and “suggests the impact of IR35 reform in the public sector was minimal, despite there being plenty of evidence out there to contradict this.

“It even goes as far to say that nearly half of public sector bodies have not assessed any contractors inside IR35 whatsoever. While a welcoming statistic, I'm taking it with a pinch of salt – blanket IR35 determinations were commonplace in the public sector."