Having spoken to a number of freelancers contracting with half a dozen public sector bodies, it seems civil servants are scratching their heads about how to implement the new rules in time for April 6th 2017.
Overall we are aware of very little contact between departments and contractors; some contractors have been contacted via their internal departmental email addresses to supply contracts to the public sector body. Correctly, the contractors have declined and asked that they are approached via their agencies and their companies; i.e. through the correct contractual chain.
Another freelancer responded that it was the intention of the contractors to approach the civil servants because everyone was becoming unnerved at not knowing. If the decision didn’t go his way, then he was off to seek work from pastures new.
However, in a move that really has shocked us, Transport for London (TfL) has contacted its contractors via their agencies to say it will simply no longer engage contractors via their own limited companies (the term used is ‘via a PSC’).
How many of their current contractors will accept this? A straw poll has suggested that TfL will definitely lose contractors if they implement the plan, albeit not necessarily all.
So, what options have been given to the TFL contractors?
- The individual continues but converts to PAYE status.
- The individual continues but is engaged via an umbrella.
- The individual is taken on as an employee on a permanent or fixed term contract, but has to go through the normal recruitment process.
- The individual ceases working for the body and would have to leave by 05/04/2017. If the individual chooses to leave, they can be replaced under one of the first three options.
- However, if the individual is critical to TfL, all options will be reviewed in order to retain their skills and deliver the work required.
In summary, go PAYE … or go!
What comes across loud and clear is that TfL does not view it is being supplied with services, but essentially with people to do work for it. If it is right and it is being supplied with individuals who are doing jobs – what one might term for sake of argument, “employees” – then why has this disguised employment been allowed to continue?
Looking at the options in more detail: we are having difficulty following the option of ‘converting to PAYE status’. It seems to be a practical description of what would happen under the new legislation if an engagement was deemed to be ‘caught’. However, the legislation allows the contractor to continue to operate through their PSC, with the fees effectively taxed under PAYE, but importantly, without employment rights.
However, TFL is clearly stating that it won’t allow PSCs; so what does ‘converting to PAYE status’ mean? Perhaps the individual becomes an agency employee? But, if they don’t, then they would have to be an employee of someone else, and the only other organisation would presumably be TFL itself. If so, how does that differ from the third option where one assumes that the individual would get full employment rights?
Option 2 is fairly straightforward, although one contractor was concerned this might be deemed to be accepting that the engagement is not only ‘caught by IR35’ in the future, but is also caught now; i.e. the concern is whether HMRC will take retrospective action – and retrospective action has been voiced on a number of other occasions, not just in connection with TfL’s approach to this issue.
Option 3 seems to be quite a high risk strategy for all parties. Even though HMRC want new arrangements to be put in place by Friday 17th February; just how quickly will TfL be able to decide on whether to take contractors on as employees? The organisation certainly acknowledges there are potential issues relating to headcount.
But Option 5 is the most intriguing. It would appear to create two sets of rules, with normal rules not applying to ‘staff critical to the business’. As one person put it, “If we’re not critical to the business, then why are we here?” Yet assuming that some are more critical than others; how will these business critical individuals be dealt with, if working via a PSC is not an option?
Will this approach by TfL turn out to be the new route to success or will it find itself trying to keep London moving, without the key contractors it needs to operate its business? There is no evidence yet that it is an approach which will be copied elsewhere in the public sector; perhaps other public sector bodies will actually look at every engagement and assess it using the eagerly awaited Online Status Tool? (As an aside, wouldn’t it be ironic if they had to engage more contractors to verify the status of existing freelancers?)
In truth, and as we noted in our recent post about the draft legislation, implementation of IR35 reform in the public sector still raises more questions than answers!
Author: Paul Mason, National Contractor Manager