IR35 and NHS Contracting

Historically the contractor would make the determination of whether Off-Payroll Working (OPW), or as it's more commonly known IR35, applied to their contract or not and this was potentially a fraught affair. If you got it wrong, then you could find yourself undergoing an HMRC investigation with the threat of a large tax bill hanging over you. Many contractors would get their contracts reviewed by a specialist solicitor so they could at least show due diligence others would join organisations like the Professional Contractors Group (PCG) which offer insurance to support the costs of fighting HMRC at a tribunal.

This all changed in April 2017 when the public sector became the guinea pig for a big shake up in the way that  IR35 would be administered. It was now the responsibility of the fee paying client to make the determination. HMRC produced the "Check Employment Status for Tax" (CEST) tool which was supposed to make it simple for the client to make the determination. This tool has been frequently criticised for producing far to many "undetermined" outcomes as well as not taking account of established case law. This left many Trust very nervous about taking on contractors outside of IR35 and this type of engagement all but dried up for the next 18 months or so.

A great many contractors ended up moving into permanent employment, either in the public or private sector, which was in part the objective of the legislation, one suspects. Ultimately the NHS found itself without the employees to deliver key projects and so started offering temporary roles as inside IR35. This mostly wasn't a considered position, it was to avoid risk. Additionally, as a Trust was now responsible for paying Employer's NIC the day rates typically went down by a corresponding amount. The contractor would then see Employee's NIC and income tax deducted and ultimately they then get paid via an umbrella company, as agencies are resistant to dealing with a contractor's own Limited company when IR35 applies. Contractors were seeing all the disadvantages of being employed and yet weren't getting the benefits such as holiday, sick pay or pension contributions.

This state of affairs continued until around 2019, with reports in the national press of projects in the public sector running over budget and subject to numerous delays. At this point, some Trusts realised they needed contractors back and the only way to get them was to offer roles outside IR35. At this point they started looking at things properly and came to the realisation that for most project work where a specific piece of work was to be delivered in a given timeframe that IR35 probably didn't apply. Legal departments were consulted and all of a sudden outside IR35 roles started becoming numerous. The delay in coming to this realisation has resulted in a significant drop in the pool size to draw upon with corresponding increases in day rates.

The private sector was due to go the same route in April 2020 until the pandemic hit at which point it was delayed until 6th April 2021. The private sector may be more risk adverse than the public sector but they would do well to learn the lessons from the public sector otherwise this could significantly impact their ability to deliver projects.