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NAO Report on Off-Payroll in the Public Sector

Read FCSA’s analysis of the NAO report on the 2017 reforms

The National Audit Office has released its report on the 2017 reforms to off-payroll working in the public sector, and it makes for interesting reading. Identifying some issues and making recommendations for improvement.

FCSA members will of course be aware of the changes introduced in the public sector in 2017 and subsequently in the private sector but may be interested to read the National Audit Office’s views on the successes and learnings from the public sector.

The report is in five parts, covering:

  • The new IR35 requirements on public bodies from 2017;
  • What HMRC did to mitigate risks it identified to compliance, public bodies and workers, including guidance and support, monitoring and adaptation;
  • What impact the roll-out has had on public bodies, workers and tax revenue;
  • How HMRC assesses public bodies’ compliance with the IR35 rules and what it has found to date; and
  • How HMRC has adapted its implementation of the next phase of the roll-out based on lessons from the public sector experience.

The report contains a 10 page summary of its findings as well as a list of recommendations for HMRC to help assist the private sector in complying with the rules.

The key findings from the report:

  • Tax revenues have increased by £100m more than HMRC expected on a net basis.
  • The number of workers deemed to be employed for tax purposes increased. It is not clear from the report how many they believe moved to umbrella companies and how many moved to client or agency payrolls.
  • Some workers disputed their tax status, but they did not have a clear legal route to appeal the determinations. This accords with feedback from FCSA members that public sector bodies knew they had to deal with appeals but they didn’t really know how.
  • The 2020/21 financial statements of government departments and agencies include a total of £263m paid, owed or expected to be owed in additional tax for failing to administer the reforms correctly. The report does not say how many of them used CEST to make the determinations but we can assume it was a high proportion. The report does make direct reference to public bodies answering the CEST substitution questions wrongly. HMRC does have a black and white view on the right to provide a substitute (which does not necessarily reflect case law) which may be challenged by private sector bodies whereas the public sector bodies seemed to have accepted it.
  • HMRC’s current approach to correcting cases of non-compliance results in it collecting more tax in total than is due, and it does not yet have a plan to address this. Details are set out in paragraph 19 of the summary.
  • HMRC may have underestimated the cost to employers of implementing the reforms. The report states that HMRC expects the administrative burden on the private sector to be small. Even this acknowledgement does not recognise the true burden and cost on businesses striving to be compliant.
  • Despite improvements HMRC has made to its guidance and tools, public bodies and other stakeholders observed it could go further to support implementation. There were mixed views on the usefulness of CEST. FCSA has previously written to Government with its own views {link }
  • Inherent differences between the public and private sectors mean that HMRC faces new and challenging risks following the wider implementation of IR35 reforms.

Recommendations for HMRC include:

  • Updating CEST and accompanying guidance to make it as easy as possible to use accurately;
  • Assessing the usefulness of CEST for different sectors. More tailored guidance may be required;
  • Giving examples of good implementation to promote compliance by helping organisations get determinations and tax deductions right first time;
  • Updating its estimate of compliance costs to hiring organisations based on actual experience, to help all parties understand the scale of activity needed and how HMRC can best support implementation;
  • Developing a more effective and efficient system to ensure HMRC accurately collects the total taxes due from workers and hiring organisations when errors have been made; and
  • Improved collaboration with stakeholders including understanding complex supply chains.

Though the report is well written and picks up on many of the issues that arose on the roll out in the public sector it failed to take into account (as it did not interview them) the impact on suppliers to the public sector such as recruitment businesses and service providers who were heavily involved in helping to implement the changes. The report acknowledges that some contractors were wrongly assessed as inside IR35; in fact nearly half of contractors who responded to one survey said that the last firm they worked for initially reacted to the reforms by implementing a ban on using PSCs; but this did not make the summary nor the recommendations section.

FCSA will continue to promote the benefits of using FCSA members in a compliant supply chain and emphasises the need for the whole supply chain to ensure the correct IR35 status for all workers. We also believe that the CEST tool in its current format is not accurate enough and does not fully meet the requirements of a tool with could produce the correct result in the majority of cases.

You can read the report in full here

This follows on from HMRC’s own report from March 2021.