It appears the walls are closing in around contractors supplying services to the Government, and that this may be the death knell for off-payroll workers in the public sector. HM Treasury‘s latest initiative is piling pressure on contractors to provide ‘assurance’ that they are not operating as employees under the beneficial tax guise of a limited company.

Over a decade ago an onerous piece of legislation known as IR35 ended a golden age for contractors providing their services through personal service companies. The legislation was designed to close the door on employees claiming that they were independent contractors, and so escape having the correct PAYE and NICs deducted from their earnings.

After a decade of fairly indirect policing by HMRC (largely because IR35’s legal definition was so unclear), the taxman finally looks set on closing the loopholes and taking a closer look at all those contractors teetering on the line between employee and self-employed, starting with the Public Sector.

The Treasury’s enforcement will see any contractor in the most senior position of a department, nine times out of ten, automatically within IR35, and so subject to tax as an employee.

Those earning a dayrate of over £220 for a six month period will need to supply formal ‘assurance’ from a specialist body that they are paying tax correctly and not subject to IR35 (although bear in mind only HMRC themselves are the ultimate arbiter of IR35 status).

There lies a real uncertainty in this area, as the degree to which Government bodies are seeking this ‘assurance’ is hugely inconsistent. You could be contracted to two different departments where one sees it as imperative and the other is totally unconcerned.

You could even go to the trouble of having an IR35 specialist review your contract, only to find your client is so anxious about you operating outside of IR35 that they refuse to accept its verdict and demand you move onto their payroll.

Senior PCG Policy Adviser George Anastasi says:

“The danger is that the longer this situation drags on, the greater the likelihood of negative impact to crucial public sector services. If you are working outside IR35 … we strongly advise all contractors asked to provide assurance to get their contract reviewed by a specialist.”

Any refusal to provide assurance is likely to lead to the immediate termination of a contract, and the possible reporting of the dismissal to HMRC for investigation.

A large portion of contractors are understandably averse to having their finances investigated, regardless of their confidence in paying their tax correctly and so opt to leave their work before ‘assurance’ is required or requested.

So, is the great exodus of contractors from the Public Sector upon us, or is it time for freelancers to dig their heels in and prove to HMRC that it’s nonsensical to force them onto payroll?

What’s certain is that contractors are spooked and, according to IR35 specialists Qdos, they have seen a noticeable increase in recent enquiries as HM Treasury pushes forward.

Labour MP Margaret Hodge (best known as the truculent Chair of the Public Accounts Committee) voiced the concerns of many – that this drive may extend to all personal service companies and suggested the state is ‘drifting back’ to when it all-but blocked PSC contracting.

Photo by Kevin Dooley