NHS U-turns on blanket IR35 assessment

Back in February 2017, the NHS sent a letter to NHS providers and trusts which effectively blanket assessed all contractors operating PSCs as inside IR35, to minimise the risk of liability and ensure that all PSC contractors were paying the correct amount of tax.

The previous letter stated:

“There is still far too much use of Personal Service Companies (PSCs) to avoid tax. New HMRC rules coming into effect in April will have a material impact on this.

“HMRC will treat all public sector ‘self-employed’ contractors using a PSC as falling under IR35 and therefore treated for tax purposes as an employee. As a result of these new rules, we anticipate that providers will need to ensure all locum, agency and bank staff are subject to PAYE and on payroll from 1 April 2017.”

The NHS is now saying that this assumption was not accurate and that IR35 assessments on PSC contractors working for the NHS should be done on a case-by-case basis.

The new IR35 rules for public sector contractors with PSCs came into force on 6 April 2017. The NHS’ initial stance to blanket assess all of their PSC contractors as ‘inside IR35’ could have had drastic implications on the operations of NHS trusts and the success of crucial projects; furthermore, there are potential financial implications for failing to take reasonable care in making IR35 assessments on individuals.

Contractor UK previously reported that 30 contractors had abandoned a £16.5m health service IT project, following an NHS declaration that they would all be inside IR35 from 6 April and subject to PAYE and National Insurance. Mass exits from key projects and much-needed locum positions would be seriously damaging to the NHS’ effectiveness and ability to provide services, which is likely one reason why the NHS has backtracked on their blanket assessment. By assessing contractors on a case-by-case basis, the NHS is doing more to ensure contractors stay on in NHS positions rather than move to the private sector.

Furthermore, The Register – reporting on the U-turn – highlighted that “if public sector bodies fail to take reasonable care over rule changes, they will be responsible for deducting PAYE and National Insurance, and for paying Employer National Insurance rather than the contractor.”

It’s safe to say that a blanket ‘inside IR35’ assessment is not akin to taking ‘reasonable care’, and although no concrete definition for how to take reasonable care exists, it’s likely that the NHS does not want to take on the potential liabilities of contractors’ PAYE and NI payments, hence the U-turn.

In their most recent update, the NHS has said that NHS providers will be responsible for making the determination as to whether IR35 rules apply to contractors on a case-by-case basis. They cite the government’s ESS tool as a way by which NHS organisations can receive help in determining IR35 status.

NHS providers were advised in the update to seek advice from independent tax experts should they require assistance on making an assessment or in resolving issues relating to specific cases.

Unfortunately, the NHS’ original position has caused backlash whereby many locums and agency workers have already quit the NHS, and thousands more have moved to umbrella companies when may not have been necessary had a proper IR35 assessment been made from the outset.

That being said, umbrella companies remove the risk of IR35 for contractors, public sector bodies and agencies across the board as a contractor is ‘employed’ by an umbrella company and as such is already being deducted PAYE and NI. This is the safest route for contractors working in the NHS and the public sector and is also the route many recruitment agencies are suggesting. Contact us for information on setting up with an umbrella company.

If you work in the public sector through your own limited company, the decision as to whether you fall inside or outside IR35 rests solely with the public sector body providing your contract, and furthermore, it has the responsibility to inform your agency of the results of the assessment. If you have been assessed as ‘outside IR35’ contact us regarding your limited company accounting options.

If you have any questions regarding contracting in the health services sector, please contact us on 01707 871622.