NHS to overturn blanket IR35 rule on contractors

The regulator NHS Improvement has decided to revise its decision to place all contractors inside IR35 tax legislation.

It had previously been decided that there would be a blanket rule applied to all locum staff and contractors working for NHS trusts, but complaints from agency staff and warnings of a public sector walkout have prompted a change of course.

IR35 is a piece of tax legislation that allows contractors to provide services to their customers via their own company. These are often known as a personal service company or a limited liability partnership.

HM Revenue & Customs believes these people should be classified as a ‘disguised employee’ meaning that they are not recognised as genuine contractors, so should be taxed in the same way as a general employee. Therefore, they are deemed as falling under IR35 regulations.

IR35 meant that temporary NHS staff would be switched to pay as you earn (PAYE). The intention was to make employers responsible for paying tax and national insurance and staff who previously supplied services to the NHS via personal service companies could legally limit their tax liability by drawing on income from their company profits.

The regulator’s ‘Working through intermediaries: IR35 update’ stated they had ‘anticipated that providers would need to ensure that all locum, agency and bank staff were subject to PAYE and on payroll for the new financial year.’

NHS Improvement Chief Executive Jim Mackey had written to NHS trusts in February saying he expected the changes to come into effect by 1st April.

However, the NHS has now admitted blanket IR35 determinations were ‘not accurate’ and a statement has been issued explaining: “The introduction of the rules has made clear that an assessment of whether or not IR35 applies should be carried out in a fact-specific way; that is, it should be applied on a case-by-case basis, rather than by a broader classification of roles.”

The update concluded: “Therefore, NHS providers, and all others categorised as public authorities, will need to consider whether or not an individual in their particular situation is self-employed when they determine the application of the IR35 rules in that case.”

A spokesman for NHS Improvement added: “Our priority is to help encourage NHS providers to ensure that agency staff pay the correct tax.”

She assured trusts that the updated guidance on IR35 rules would prevent ambiguity on how they should proceed. In addition to this, the regulator highlighted a new tool from the Government that would help with assessments for if a worker should be subject to PAYE.

Seb Maley, CEO of QDOS Contractor, said: “Prior to recent reform, a staggering 85% of contractors stated they would stop working in the public sector should they be placed inside IR35. And contractors are vital components of all major public sector projects, particularly the NHS.

“The final IR35 legislation clearly stated that ‘reasonable care’ had to be taken when making decisions over the IR35 status of public sector contractors. Put simply, this means that public sector employers and agencies should not make blanket determinations.

“Going forward, assessing contractors on a ‘case-by-case’ basis will prevent them all being unfairly tarred with the same brush, and will only go to benefit the NHS, and hopefully set a marker down for every public sector organisation.”

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Date published 31 May 2017 | Last updated 31 May 2017