Public Sector: Belligerence or Ignorance?

Why won’t the public sector accept independent advice?

After the first anniversary of the rules affecting those freelancers contracting within the public sector it appears some contractors are still struggling to get departments to accept independent advice about their IR35 status.

The ‘off-payroll’ rules have to be applied by public sector bodies where a freelancer operates under Board level and is earning over £220 per day (approximately equivalent to £58,200 p.a.) for an engagement that lasts longer than 6 months. In these circumstances the relevant government department must seek assurance from the contractor that they are meeting their tax obligations, i.e. inside or outside of IR35. Even those freelancers who are earning £220 per day or less for a period over 6 months can even be asked to provide the same assurance as this is left to the discretion of the public sector body concerned.

On 24th August 2012, the Cabinet Office issued ‘Procurement Policy Note – Tax Arrangements of Public Appointees’ (PPN) (PDF), which was to be circulated to all government departments, executive agencies, non-departmental public bodies and the relevant contracting authorities. The PPN contains  an ‘Assurance Guide’ which sets out the level of evidence a contractor must provide to satisfy a department that their income tax and NIC obligations are being met correctly and that IR35 does not apply, those being:

Low risk

A contractor must be able to show that they are at low risk for IR35 by reference to HMRC’s business entity tests (BET’s) at the 6 month point of the contract and provided the terms of the engagement remain the same, the PSC will remain low risk for the duration of the contract.

Medium or high risk

Again by reference to the BET’s, if a contractor is within this category but feels that they are outside the scope of IR35 then they have to provide assurance in a different way. The PPN suggests, as an example, the required evidence could be satisfied by a contract review carried out by HMRC’s IR35 helpline. This is however only a suggestion and last year Contractor Weekly learned of an internal memo from the Department of Health titled, ‘Implementing the Recommendations of the HM Treasury Review of Tax Arrangements’, that suggested that public sector organisations would be able to accept evidence from a contractor’s tax advisor or accountant. In different annexes to the memo it states the following with regard to seeking assurances regarding IR35:

• ‘The individual is responsible for the information provided, even if it comes from their accountant or professional adviser.’; and
• ‘Individuals should seek further advice from their accountant or tax advisor’.

Not surprisingly however there appears to be inconsistency across departments as to what is acceptable evidence. The Ministry of Justice, for instance, appear to be going through a spell of ignoring independent expert advice preferring instead to force the contractor into accepting that IR35 applies or their details will be referred to HMRC and ultimately the contract could be terminated. Could this have something to do with the fact that since April of this year the Treasury and Cabinet Office have been monitoring the implementation of the ‘off-payroll’ rules and maybe instructing departments to meet quotas, reminding departments  that sanctions in the form of a fine of up to five times the salary in question will be applied to any department that has not applied the rules? Or is it down to sheer ignorance and an inability to properly evaluate evidence that causes departments to revert to the fail safe guidance in the PPN that states where a department is not satisfied with the evidence they receive they may send details to their customer relationship manager (CRM) or customer co-ordinator in HMRC to be considered alongside other intelligence? Whatever the reason it is simply not fair and unacceptable.

Earlier this year the Professional Contractors Group (PCG) announced that they planned to take the Government to task over the discriminatory attitude adopted by some of its departments by way of a Judicial Review. Chris Bryce, chairman of the PCG, said in an open letter that the “PCG considers this practice to be unacceptable and has taken legal advice. We do not believe that a Government Department has the right to force our members to operate IR35 if their contracts are outside IR35. We want to challenge this by a pursuing a Judicial Review and we need members to come forward to supply us with real cases and allow us to represent them.”

What can be done?

Any contractor who falls within the medium – high risk category should firstly consider whether there is anything they can do to tip them into low risk. For instance, actually sending a substitute in their place, just for a day, and taking responsibility for that replacement including paying them, would secure 20 valuable BET’s points ending any arguments over the application of IR35.

Where it is not possible for a freelancer to achieve the holy grail of low risk, then they should challenge any government department that refuses to listen to independent advice by asking them to explain how their actions marry with the guidance contained with the PPN (see attached), i.e. try to make them think again.

The options are very limited at present as the public sector bodies seem to be holding most of the cards and contractors over a barrel to boot. To maintain and pursue this policy however would be folly and short sighted as it could make working in this arena unattractive and leave the Government with a shortage of much needed skills and egg on their face into the bargain!