Further doubts have been cast over HMRC’s research into the impact of the Off-Payroll rules in the public sector following the glaring omission of key information concerning the financial effects.
The HMRC-commissioned IFF Research report has been consistently used by the taxman in a bid to vindicate the public sector changes and support the controversial private sector proposals. However, analysis of the invitation to tender (ITT) for the study reveals that the published ‘Off-Payroll Reform in the Public Sector’ report failed to fulfil a number of criteria.
The news comes two months after HMRC acknowledged that earlier drafts of the report contained information that was subsequently removed, adding that the omitted information could otherwise have impeded its ability to introduce the private sector reform.
“There are a lot of questions that have gone unanswered, specifically regarding the financial impact of the Off-Payroll rules and most importantly where employer’s National Insurance (NI) contributions are being sourced from,” highlights ContractorCalculator CEO Dave Chaplin. “We have enquired about this issue to HMRC, but our attempts to find an answer have been stone-walled.”
What key information was missing from the published report?
Responding to a freedom of information (FOI) request, HMRC recently shared its ITT for the Off-Payroll public sector study with ContractorCalculator, which IFF Research ultimately won. An examination of the ITT exposed a number of shortcomings with the final report.
Notable was the absence of a detailed analysis of the fiscal impact of the changes, as required by the ITT, with sufficient detail only provided when analysing the administrative costs incurred by public bodies.
Most alarming was the fact that the published report failed to acknowledge how the additional employer’s NI costs were being funded. This was in spite of the fact that HMRC’s ITT explicitly posed the question: ‘Have public sector bodies absorbed the cost of the additional employers' NICs, or has this been accounted for in some other way?’
The Off-Payroll rules require that employer’s NI and the Apprenticeship Levy be paid on top of the rates paid to ‘deemed employees’ at a combined rate of 14.3%. However, from the meagre amount of financial analysis that was published, the report concluded that the financial impact of the regime on public bodies was largely insignificant.
In addition to this glaring omission, the final report failed to address numerous other questions in the ITT, including:
- To what extent were internal processes required in order to comply with the reform? If so, what new processes have been introduced?
- Has the reform brought any other issues to light, for example, employment rights?
- Did the impacts (financial and otherwise) vary by group?
The £550m elephant in the room
HMRC attributed a £550m increase in income tax and NI via Pay As You Earn (PAYE) from public sector engagements to the Off-Payroll rules shortly after their implementation, causing Chaplin to speculate as to where the money is coming from:
“Calculations show that roughly 84% of the perceived tax shortfall resulting from Off-Payroll would be due from the hiring organisation when applying the Off-Payroll rules. If approximately 84% of this £550m boost to the Exchequer has come from public sector bodies, we find it extremely hard to believe that the fiscal impact of the reform was negligible, as the report suggests.
“That is unless the contractors are unlawfully being forced to stump up. In either case, it’s absolutely astonishing that the research HMRC has tried to use to justify the reform offers no explanation as to how this sum has been accounted for.”
Who is to blame for glaring employment costs omission?
In April, the taxman conceded that earlier drafts of the report contained information that was subsequently removed. Responding to a separate FOI request from ContractorCalculator, HMRC refused to disclose the information, acknowledging that doing so could impede its ability to introduce the rules to the private sector.
“We can already gauge from HMRC’s admission that the information withdrawn from publication was both significant and potentially extremely controversial,” Chaplin adds. “The exposure of widespread unlawful deduction of employment costs from contract rates would fit the bill.”
Though there have been frequent reports of public sector bodies making employer’s NI deductions from contract rates, HMRC has consistently denied the issue, dismissing all evidence of non-compliance in the public sector as merely “anecdotal”.
HMRC denies foul play in wake of mounting evidence
Recently, ContractorCalculator published details of an ‘IR35 factsheet’ distributed by Network Rail to contingent candidates, explicitly informing them that individuals deemed within scope of IR35 would have employer’s NI deducted from their rate.
And while employment costs aren’t addressed by IFF Research, there are still clues within the report suggesting that these deductions are commonplace. Most notable is a quote from a central body in the health and social work sector, stating:
“We have had instances around Employer’s NI where locums have argued that our rates need to increase to cover the costs of NI, etc. We have had to have discussions in cases where we need the skills of the individuals involved.”
In spite of the substantial evidence to the contrary, HMRC maintains that the final report encompassed all available evidence and that it met the ITT. Though HMRC repeatedly failed to address specific questions from ContractorCalculator concerning the absence of important information, its press office provided the following statement:
“IFF Research and Frontier Economics was commissioned by HMRC to gather evidence on the experiences of public sector bodies when implementing changes, following reform of the off-payroll working rules in the public sector. Their research showed the reforms had not resulted in significant disruption to the sector, or to its use of contingent labour. The report used all available evidence to reach its conclusions and delivered against all of HMRC’s aims for the work.”
Independent NAO research ‘of paramount importance’
According to Chaplin, HMRC’s statement, coupled with the clear inconsistencies between the taxman’s ITT and the final published report, points toward only one conclusion:
“HMRC claims that the research delivered against the tender. If this is true, we can only assume that information was deleted during HMRC’s redrafting stage, probably because it was too damaging and controversial.”
He concludes: “Given the serious questions of trust surrounding HMRC at the moment, particularly with the Loan Charge, it’s of paramount importance that the National Audit Office (NAO) conducts its own independent research to establish the facts. HMRC should not be invited to redraft the resulting report, as it clearly cannot be trusted to present the evidence in a balanced manner.”