HM Revenue and Customs has published a report looking into the impact of off-payroll rules on the public sector.
The IR35 rules came into force for public sector employers in 2017 as the government began its crackdown on organisations using “disguised employment” practices to pay lower levels of tax and national insurance.
HMRC commissioned IFF Research and Frontier Economics to gather evidence on the long-term impact of the introduction of the rules, which put the onus on employers – rather than contractors – to demonstrate employment status for tax.
The research found that 95% of central government bodies had engaged off-payroll contractors since 2020, with a mean ratio of 79 direct employees for every off-payroll contractor.
The most common way to employ contractors was through personal service companies, which accounted for 57% of contractors engaged by sites and 56% engaged by central bodies.
Almost half of public sector employers analysed for the study said there had been no change in the number of direct employees between March 2017 and March 2020, while 25% reported an increase in direct employees, and 26% a decrease.
Nearly three-quarters (72%) of sites said there had been no change in the number of off-payroll contractors they used over the same period.
These figures go against fears expressed early into the implementation of the rules that they would lead to a sudden drop in the use of temporary skills.
Surprisingly, almost half (48.5%) of bodies said 0% of contractors were assessed as inside IR35, which would mean they had to pay the same level of tax and national insurance as a directly employed individual, and that employer contributions should reflect this.
Most sites across the public sector said it had been easy to comply with the reforms, although 53% of central bodies found it difficult.
Those who found it easy commonly reported that the government’s Check Employment Status for Tax tool had helped their decision – suggesting improvements have been made to the much criticised tool.
Seb Maley, CEO of contractor specialist Qdos, remarked that the study reflected “minimal” impact on the public sector in its use of contractors, despite evidence to the contrary.
“It even goes as far to say that nearly half of public sector bodies have not assessed any contractors inside IR35 whatsoever. While a welcoming statistic, I’m taking it with a pinch of salt – blanket IR35 determinations were commonplace in the public sector.”
He added that it was difficult to get a “true sense of public sector reform” without asking the contractors themselves.
“We’re also told that around half of public sector organisations didn’t use any information to ensure their compliance, whether from HMRC or third party specialists,” he said.
“This I can believe. The hundreds of millions in tax liability and penalties issued to government departments for non-compliance shows that the public sector wasn’t nearly well prepared enough for IR35 reform.”
Off-payroll rules came into force in the private sector in April 2021, having been delayed due to the pandemic.
In December, a survey of contractors by compliance platform IR35 Shield found that the introduction of off-payroll rules to the private sector had had a “significant and damaging” effect on contractors, with many companies drastically reducing their use of contractors or moving work overseas.