April and May saw further developments for the NHS, and an update where IR35 is concerned, which has led to yet another shift in the consultancy landscape throughout June. On 6th April, the NHS Improvement (NHSI) forced a blanket ban on any interim consultancy that was being provided by contractors working outside IR35.

In addition to this, the application of the NHSI (Monitor) Caps was being enforced across the majority of Acute Trusts. This aligned every contractor to a job grade, and a pay rate that is much more closely aligned to the relative permanent salary. The combination of these factors effectively pushed hundreds of contractors out of the NHS. Projects have been left under-resourced and outcomes are failing.

This turn of events has proven especially problematic in hard-to-reach areas, where contractors were faced with long commutes and stays away from home, in order to complete their work. According to the guidelines, both travel and accommodation expenses are difficult to justify when you are working inside IR35.

The Logic Behind IR35…

The purpose of the changes to IR35 is to ensure everyone was paying the right amount of tax, and that there were clear distinctions between the employed and self-employed. The move has been designed by the Treasury, in an effort to raise an additional £185m for the 2017/18 tax year. The logistics, however, have proven to be a nightmare for many contractors.

In the wake of a painful and stressful two months for NHS Trusts, the NHSI announced on May 31st that it had not been accurate with their blanket approach, and has recommended that all IR35 decisions should be made on a case-by-case basis.  

https://improvement.nhs.uk/uploads/documents/IR35_Update_30May1.pdf

The majority of contractors performing a regular job (i.e. temporary workers) will likely still remain inside IR35. Those whose expertise have been drafted in to deliver key projects and/or outcomes will most likely find they are able to retain their status as independent consultants.

Why The Sudden U-Turn On IR35 Reforms?

There are several possible reasons for the NHS’s sudden U-Turn concerning the IR35 reforms. One likely possibility is that the initial decision was a knee jerk, caused by a desire to avoid costly mistakes. As IR35 came into effect, and the final legislation clearly indicated that it was essential for public bodies to take ‘reasonable care’ where decisions were concerned, it’s likely that the original position was reconsidered.

As the initial panic caused by IR35 ebbed, the situation could be seen in a clearer light. Blanket determinations are never going to be fair, or take into account the individual. As such, any organisation with a blanket decision-making process in place cannot be seen as taking ‘reasonable care’.

The move originally intended to protect the NHS from making incorrect determinations had become a policy that directly violated the legislation they were so concerned with upholding. This effectively rendered their original decision contradictory, and problematic for different reasons. Failure to take reasonable care when it comes to IR35 will now result in the public sector body responsible for the decision (in this case the NHS) becoming responsible for paying Employer National Insurance in place of the contractor.

In other words, the blanket decision was made to avoid incurring penalties for making a wrong decision, but as IR35 unfolded it became clear that the blanket decision itself would result in penalties, prompting the abrupt U-turn.

Another factor that likely influenced the decision may well have been the large number of contractors who reportedly abandoned the NHS in the wake of their declaration that all contractors would fall under IR35 from April 6th onwards. Contractor UK reported earlier this year that the NHS’s decision had prompted thirty contractors to abandon an £16.5m IT project with the health service, which had overrun.

With blanket rulings having such a hugely negative impact, highly skilled contractors working with firms in the public sector have been abandoning their employers in droves. Meanwhile, the private sector has been luring locums away from their public sector positions, leaving the NHS and many other organisations in the public sector high and dry.

The NHS reacted to the situation by increasing their rates for locums, in an effort to counter the negative impact of their blanket decision, but at the end of the day, this may have proved to be too little, too late. In the chaos that followed it’s hardly surprising the NHS reversed their decision, and it’s likely they would have been forced to do so even without the threat of finding themselves liable for additional taxes, due to a failure to exercise reasonable care.

How Recruiters Are Responding To The Blanket IR35 U-Turn…

The recruitment industry has greeted the NHS’s decision to reverse their blanket decision with a mixed response. While the U-turn has undoubtedly provided a glimmer of hope for contractors, where previously there was none, it’s likely that many will still be caught up in IR35 if they were not already under contract when the new regulations kicked in.

While the NHS’s new guidance on the subject of IR35 clearly encourages NHS Trusts to seek out expert advice for any cases that are ambiguous, it’s as yet unclear where the NHS will fall in determining which (if any) cases involve ambiguity, and how harsh they will be in their rulings.

Despite the abandonment of blanket decisions, it seems likely that a lot of professionals who did not previously fall under IR35 are still going to find themselves reclassified. Where the NHS specifically is concerned, it’s likely that medics (being as they are highly skilled) will most likely still find themselves caught up in IR35, and forced to pay the additional fees, or seek work outside the public sector. Non-clinical staff, on the other hand, including IT professionals and those in administration and procurement, along with project officers, will likely find themselves classified as falling outside IR35 by the NHS.

The U-turn will also mean a considerable challenge for the NHS, from an administrative standpoint, with the need for a case-by-case assessment of contractors causing a logistical nightmare that was, presumably, one reason they chose a blanket decision-making process in the first place.

What Does This Mean For NHS Intermediaries?

The new IR35 rule (which has now come into effect for the 2017/18 tax year) has changed the manner in which a person’s tax status is determined, shifting the responsibility for determining whether or not individuals are employed or self-employed (and thus whether they fall inside, or outside IR35) to ‘public authorities’. As a public authority, the NHS is now responsible for assessing which of their employees are ‘fee payers’, according to the new legislation. As a public authorities the NHS are (usually) required to make the relevant national insurance and tax deductions for those employees who fall under IR35.

While the May update to the NHSI guidelines have made things a little less dire for NHS contractors, there are still certain requirements that must be upheld. The benefit of this update is that there will be no ‘blanket decisions’ applied to all agency and locum staff. As a result, the trust itself should be better able to ensure the completion of projects and the retention of interim workers. However, each trust is still required to have a clear understanding of how to determine whether or not individuals fall inside or outside IR35.

The NHS are still responsible for making the determination, however they are now able to do it on a case-by-case basis. Provided the decision is made fairly and accurately, taking into account all relevant factors of the individual, things should move a lot more smoothly in future.

How To Determine Who Falls Under IR35…

In the run up to the new IR35 guidelines kicking in we received a lot of questions about exactly how to determine who fell under IR35 in light of the new guidelines. There was considerable confusion, and fear that contractors were going to face hefty increases in their tax bills, regardless of their genuine status, due to the desire on the part of clients and organisations now making the decision, to play it safe.

In response to this, we worked up a clear and easily followed IR35 Blueprint – a relatively simple set of questions that, once answered, will determine whether or not a person should be classed as a temporary worker (brought in to cover a vacancy), or an interim consultant (brought in to deliver an outcome).

Making this distinction is the key to understanding who falls under IR35. A temporary worker falls under IR35, while an interim consultant falls outside IR35. You can find our IR35 Blueprint here. If you need further advice of which of your projects could be considered outside IR35, please get in touch.

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Richard Collins, Managing Director at IEG. Originally a design engineer, Richard has clocked up 10 years’ experience as an executive level recruiter within public sector procurement, finance and commercial management. Career highlights include generating circa £1.2m gross profit from two start-up businesses in five-years, but he also thrives on delivering and building teams. Post 5pm accomplishments include extreme sports and being Daddy to two beautiful daughters.
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