Empowering the Freelance Economy

“Ironic”: IR35 reforms have facilitated a zero-rights employment boom in the public sector

Public sector contractors are more likely to be hired as zero rights employees
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The Department for Work and Pensions has released its accounts for 2022-2023. The findings reveal government contractor hiring practices are increasingly favouring zero-rights employment which could go against HMRC’s former concerns about fair rights for contractors

The figures show a shift by the DWP over the last three years; the DWP has gone from hiring around 24% outside IR35 contractors to effectively “banning contractors from working that way” because the DWP’s outside IR35 figure is now down to less than 3%, says Dave Chaplin, CEO of IR35 Shield.

These findings are against the backdrop of HMRC’s historic claim that only a third of contractors were caught by IR35. Figures from the DWP’s accounts of 2020-21 reveal that the department faced £86m in tax bills from HMRC. It now appears that in the last three years, the DWP has instead classified almost every contractor they hire as a “deemed employee,” according to IR35 Shield research.

The latest DWP accounts indicate that the vast majority of their contractors are hired as “Inside IR35,” classed as employees for tax purposes, but without any of the rights of employment, contrary to one of the central aims of HMRC over two decades ago, Chaplin points out.

Chaplin says the latest employment figures for DWP are concerning. “The DWP are either now misclassifying hundreds of self-employed working people, who have now had their right to operate as their own boss taken away from them, or they have deliberately chosen to hire workers who are classified in law as employees, but have instead hired them via limited companies, thereby denying them any employment rights,” he says.

Zero-rights employment on the rise in the public sector

“This ‘middle-way’ rights-loophole of hiring hard-working professionals is ‘zero-rights employment’, and you would expect the Department of Work and Pensions to behave more ethically rather than exploit this gaping hole in the statute,” says Chaplin.

Chaplin continues, “HMRC has not only saddled the DWP with an £86m tax bill in 2020-21, but its enforcement activity now appears to have cut off DWP’s supply to the best workers.

“This is a classic symptom of the misguided Off-payroll reforms – a policy invented and pushed through Parliament by HMRC bureaucrats. It now hangs around the necks of Conservatives Ministers who should hang their heads in shame for allowing it into the statute books. It’s anti-business and anti-growth.

“It’s also somewhat ironic, that HMRC bleated about the rights issues when creating IR35 over 20 years ago, and that now, due to their new reforms, they’ve actively facilitated an environment of “zero-rights employees,” under which the vast majority of DWP contractors are now hired.”

HMRC relying on temps

HMRC has revealed its plans to engage 1,630 extra temporary workers every month until September, as it looks to improve declining service levels – a move which flexible working expert, Qdos, says “smacks of irony”.

In its latest set of accounts (page 299), HMRC stated that it will engage 1,630 additional temporary staff monthly, between April and September. This is to improve customer service levels which have seen average call waiting times more than treble since 2018/19. 

Typically, taxpayers spent 16 minutes 34 seconds to speak to an advisor in 2022/23, with waiting times exceeding 20 minutes on average in the last quarter of the financial year. This is compared to 5 minutes 14 seconds in 2018/19, Qdos has reported.

HMRC’s plans were announced in the same report which showed that the tax office did not engage any contractors outside the scope of the IR35 legislation in 2022/23, according to Seb Maley, CEO of Qdos.

“The fact that by September HMRC is bringing in thousands of temps highlights the vital role that flexible workers play in challenging times,” says Maley.. “But its plan to engage 1,630 more flexible workers every month when HMRC won’t engage contractors outside IR35 smacks of irony. 

“On one hand, HMRC desperately needs temporary workers to improve declining service levels. On the other, it seems to be giving them no choice but to work on the payroll – regardless of their true employment status.

“Let’s not forget that this is the same body that created, enforces and insisted on reforming the IR35 legislation. Rather than demonstrating to other organisations how different types of flexible workers can be engaged, HMRC is a shining example of how not to go about it.”

When the FI asked Maley if the temps were called in to field customer calls, Maley says, “HMRC doesn’t explain if these temps have or will be engaged via an umbrella company or employment agency. However, the tax office does indicate that these workers will support its telephone and postal services – so it’s unlikely that these temps operate via limited companies, meaning IR35 comes into play. 

“This doesn’t detract from the bigger picture, though. HMRC has stopped directly engaging contractors outside IR35 but is all too happy to lean on other sectors of the temporary workforce when push comes to shove. 

“It’s difficult not to see the irony and speaks volumes of HMRC’s haphazard approach to engaging flexible workers.”

What is IR35?

IR35 is a UK tax legislation that determines whether a worker is employed or self-employed for tax purposes. In the UK public sector, all contracts for services supplied through an intermediary (such as a limited company) are subject to IR35 unless the client can demonstrate that the worker is not an employee. This means that if you are a contractor working in the public sector, you are likely to be inside IR35 unless your contract meets certain criteria.

UK public sector jobs that typically rely on inside IR35 roles

If you are a contractor working in the public sector, it is important to understand whether your contract is inside or outside IR35. This will affect the amount of tax that you pay and your employment rights. If you are unsure of your status, you should speak to a tax advisor that understands IR35 legislation and the latest reforms regarding Off-Payroll recruitment.

There are a number of factors that can affect whether a public sector job is inside or outside IR35. These factors include:

  • The level of control that the client exercises over the worker
  • The degree of integration of the worker into the department
  • The degree of financial risk that the worker bears

There are a number of UK public sector jobs that rely on inside IR35 roles. These roles typically involve providing services that are closely aligned with the core functions of the public sector organisation. For example, inside IR35 roles are common in IT, finance, and HR.

  • IT consultant
  • Finance Analyst
  • HR manager
  • Project manager
  • Software Developer
  • Business analyst
  • Compliance officer
  • Quality assurance engineer
  • Data scientist
  • Cyber security specialist

These are just a few examples, and there are many other public sector jobs that could fall under IR35. If you are considering a contract role in the public sector, it would be wise to check the IR35 status of the role before you accept it.

  1. Kenny says

    “In the UK public sector, all contracts for services supplied through an intermediary (such as a limited company) are subject to IR35 unless the client can demonstrate that the worker is not an employee. This means that if you are a contractor working in the public sector, you are likely to be inside IR35 unless your contract meets certain criteria.”

    This is misleading, because big consultancies are exempt from the regulation. This means if they provide worker who works as an employee, they are allowed to make profit off their work. Typical example is big consultancy hiring a developer on £60k salary and selling their service for £600 or more per day. If such corporation has a multinational structure, they can easily shift this profit offshore.
    Effect is that government gets workers who couldn’t find jobs elsewhere, the pathway to starting own consultancy business is closed and reserved for big players and big players are allowed to avoid paying taxes by exemption from IR35 rules.

    This needs an investigation.

    IR35 has been created precisely to stop talented workers from competing with big consultancies. Nothing to do with taxes. If the goal was to increase the tax yield, then big consultancies wouldn’t have gotten an exemption.

  2. Dave T says

    The Tories could lose the next general election because of this IR35 implementation – taking away the rights and freedom of the self employed to be their own boss. The result is a national workforce working less or retiring early causing a stagnant economy. The current government lacks vision in favour of short term gains and this could be their downfall. I will be voting for a government that will reverse this policy!

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