Changes to the legislation made last year – which had been expected to have a big impact on IT contractors – have also brought in £410m in extra revenue, the tax agency claims

Credit: Flickr/Dave Crosby

Changes to the legislation made last year – which had been expected to have a big impact on IT contractors – have also brought in £410m in extra revenue, the tax agency claims

HM Revenue & Customs has revealed that a public-sector crackdown on tax avoidance among supposedly self-employed workers brought in £410m last year but had “relatively little impact on projects or vacancy-filling”. The tax agency also outlined steps towards introducing similar measures in the private sector.

So-called “off-payroll” working involves contractors, often consultants, charging for their work via their own companies and benefiting from tax arrangements designed for the self-employed when, in reality, they are employed by a third party such as a government department or NHS body.

Reforms made to the legislation last year were expected to have a big impact in the digital and technology space, with as many as 18,000 people estimated to work as IT contractors in the public sector.

As part of its consultation on the potential private-sector rollout of a new stricter regime that places a greater onus on employers to police their contractors’ “real” status, HMRC published figures for changes introduced for contractors working in the public sector, which revealed that an extra £410m was paid in the 2017-18 tax year.

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HMRC said off-payroll workers not paying the right tax were projected to be responsible for underpayment of up to £1.2bn by 2023 as it sought views on subjecting private-sector to similar toughened rules.

IR35 was introduced in 2000 with the aim of properly defining self-employed status, but HMRC said it estimated that the rules were not applied correctly in 90% of cases in the private sector.

Last year’s public-sector reforms made employers responsible for determining whether the workers they oversee are genuinely self-employed contractors, and empowered them to deduct proper tax and National Insurance payments if the conclusion is that they are not.

Before the public-sector changes came into effect, under the Finance Act 2017, tax experts warned that government departments and other employers risked prompting an exodus of contractors – not least in the IT space – making HR departments more risk-averse and reducing organisations’ flexibility to buy in the talent they needed.

HMRC said independent research had shown that the reform “has had relatively little impact on projects or vacancy filling in the public sector”.

That study, conducted by IFF Research and Frontier Economics, compared staffing arrangements at “central bodies” between March and August 2017 and found that while overall headcount levels had fallen, off-payroll workers made up a smaller proportion of workers after the new rules came into effect.

Financial secretary to the Treasury Mel Stride insisted that the government was not seeking to penalise contractors by tightening tax rules for the self-employed.

“It’s very important that we recognise the hard work of contractors across all sectors, who contribute to our growing economy,” he said. “But it’s also right that we have a fair tax system that balances efficiency and simplicity for taxpayers, while also supporting our vital public services. That’s why we’re consulting carefully and welcome a wide range of opinions and evidence on how to tackle non-compliance.”

The consultation on widening the Finance Act reforms to the private sector is open until 10 August.