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Is this the tipping point for off-payroll working?

6 Apr 2017
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Regional UK city Lincoln’s hospital’s Accident & Emergency Department was at risk of being closed this week. This was not due to a deluge of patients or a lack of funding but rather the result of a recent tweak to the UK’s tax rules and could have far reaching ramifications for the UK-wide review of self-employment practices, currently underway.

A change to the policy guidance for tax rules, introduced in 1999, to cover the growing use of personal service companies that comes into force today has prompted a number of locum doctors, on which the NHS increasingly relies, to refuse to fill their shifts. NHS Improvement, the body charged with ensuring England’s hospitals maintain sound finances and quality care, has had to add this to its ever-growing list of urgent problems across the health service

NHS Improvement’s Chief Executive Jim Mackey has roundly criticised those locums looking to extract higher payments from hospitals and Lincolnshire health managers have scrambled to find staff to cover shifts but this could be the tip of a much larger workforce challenge iceberg for the UK public sector.

IR35, also known as the ‘intermediaries legislation’ was put in place to determine which contractors, especially those employed through limited companies or personal service companies, should pay income tax and national insurance on the same basis as standard employees. The rules have been in place, and have been controversial, for many years, but this year’s rule change means public sector employers now have the responsibility to determine which of their contractors is covered by the policy; many are playing it safe and applying IR35 to all outsourced staff.

With increasing numbers of public sector workers - doctors, social workers and teachers - preferring to work on an agency basis, the tax reforms could have a significant impact across the UK’s public services. The Treasury hopes that the measure will bring in between £185-440m per year, income that otherwise would have found its way to the 70,000 or so agency workers in schools, hospitals and the civil service. This will undoubtedly prompt behavioural change and a great deal of uncertainty for the service industry that has grown up around supporting this form of self-employment.

For the government, the question is overwhelmingly practical. Most major IT projects rely heavily on 18,000 digital contractors, who overshadow the 12,000 in-house staff that public sector employers have on their books. These contractors are already starting to walk away. Local problems in the NHS can, in the short term, be solved through some sharp negotiating with staff, but for IT, the problem could become terminal. It remains to be seen whether HMRC will hold fast and seek behavioural change from the public sector workforce, with a corresponding fall in the use of personal service companies or whether this will become another politically costly U-turn.

Either way, this will feed into the Taylor Review of modern employment practices, launched late last year and due to report in the Autumn. This has become a repository for sticky policy problems, not least the Treasury’s aborted rise in national insurance contributions in this year’s budget. The review has a broad remit and will consider the balance between employment rights and the financial benefits of various forms of self-employment. It could prompt an overhaul of the definitions the government uses to cover employment status and will take a close look at new business models that place flexible working at the heart of their operations. While likely having the greatest ramifications for companies such as Uber and Deliveroo, the findings and recommendations of the review could also prompt overhaul the tax and benefits framework for public sector agency workers, creating even more disruption for employers. For those making public or private investments in assets that rely on this array of alternative employment models, these policy changes will likely become material considerations for making pricing decisions.

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