Contractors losing contracts due to inconsistent application of off-payroll rules

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Contractors are being prematurely terminated and moving away from the public sector due to the inconsistent application of the off-payroll rules.

Contractors are suffering from “a pre-determined view that [they] should be inside of IR35”, and those at low risk of being inside IR35 are being inappropriately investigated as a result.

This is according to the latest minutes from the IR35 Forum, in which forum members criticised the inconsistent application of the off-payroll rules, adding that inappropriate application of the rules was “encouraging contractors to move away from the public sector.”

The rules were introduced in September 2012 in the wake of the so-called Ed Lester/Student Loans Company affair. They say that any contractor earning over £225 per day or on a contract over six months in length must demonstrate they are paying the correct income tax and National Insurance Contributions (NICs).

Contractors unable to do so to the satisfaction of their public sector client face being forced to join their client’s payroll or early termination. Evidence from some government departments shows that dozens of contracts have not been renewed or the contractors terminated as a result.

Between 23 August 2012 and 31 March 2013, the Department for Business, Innovation and Skills BIS) alone either terminated or chose not to renew over 100 contracts “for tax reasons”.

BIS’s approach also highlighted the inconsistency of application of the rules, because it reviewed the tax affairs of all off-payroll contractors, despite only being required to review those earning over £225 per day or on contracts lasting over six months.

The issue has become such a concern to contractors that contractor and freelancer group PCG ran an off-payroll briefing for Ministry of Justice (MoJ) contractors. PCG examined the MoJ’s ‘working practices questionnaire’, which all contractors at the ministry have been asked to complete.

According to PCG senior public affairs adviser Andy Chamberlain, the inconsistent application of the rules could damage public sector service delivery “if it restricts public sector access to contractors and other project-based resource”.

“The review by HM Treasury is extremely vague when it comes to how individual Departments are supposed to comply with the measures,” he says, “and this has led to a variety of different approaches across public sector departments, with varying levels of effectiveness.”

In the IR35 Forum, some members agreed with Chamberlain, highlighting that the procurement policy guidance issued to government departments by HM Treasury was ‘vague’.

Worryingly for contractors, the consensus of the forum was that if there was an impasse where the government department was not satisfied with a contractor’s response, the contractor would be prematurely terminated.

However, PCG has written to the Chancellor and Chief Secretary to the Treasury about poor guidance and inconsistent application of the rules, which the forum’s Treasury representatives promised to follow-up.

It is possible that, as the first anniversary of the imposition of the rules is approaching in August 2013, an annual review triggered by PCG’s approach to the Treasury may prompt the issuance of clearer guidance.

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Shams Urrehman
MD Accounts Direct

Hi, I'm Shams Urrehman, Qualified accountant since 2005 and Director at Accounts Direct Ltd since 2009. I have been advising freelancers, management consultancies, IT contractors, SME’s and other businesses about accounts and tax planning.

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