NHS confirms it's whole workforce inside IR35

The NHS has taken the decision to move ALL of its PSC workers “inside IR35” as from tomorrow (6th April 2017). As a headline this may not sound like a big deal, but for PSC workers in the NHS it means a significant reduction in income with little or no recourse.

What’s changing?

A PSC (Personal Service Company) contractor is either “inside” or “outside” IR35 (although HMRC doesn’t give the exact definition of either status, claiming to make the assessment on a case-by-case basis). If a worker is “inside” IR35 it means that to all intents and purposes they look like a regular employee, i.e. they keep the same hours, work at the same location and do the same job as a permanent employee. But rather than go on the payroll they use their own limited company to pay themselves, or get paid via an intermediary company (such as an agency) or an umbrella company.

Changes to IR35 rules regarding PSC workers in the public sector were confirmed by the Government in the 2016 Autumn Statement and will come into effect on 6 April 2017. Briefly, rather than the PSC worker deciding their own status under IR35 legislation, that decision now falls on the end client (or “engagers”), in this case the relevant NHS Trust. There is also now a legal responsibility for the end client to maintain a register of PSC workers within their organisation and failure to do so will be a criminal offence. What’s more, the regulations stipulate that “reasonable care” must be taken when engagers come to assess the IR35 status of PSCs.

This means that the new rules now place the obligation on public sector bodies to assess PSC workers individually and decide if IR35 applies. Naturally some organisations don’t have the resources so rather than try to assess each individual they’re just applying a blanket rule to move all PSC workers inside IR35 and so become liable for PAYE, NIC and other payoll deductions.

The NHS’s solution

This is exactly what the NHS has done. It has unilaterally decided that its entire PSC workforce is inside IR35 - and overnight thousands of PSC workers are going to find themselves worse off to the tune of several hundred pounds a year, if not more. The individual NHS Trusts will either deduct PAYE and NIC taxes from the money they pay directly to the worker or agency, or will instruct the agency to do so. This will apply to all payments made from 6 April onwards, even if the work was carried out beforehand.

Ouch! The words “sledgehammer” and “nut” spring to mind

But the NHS may find itself on thin ice by taking such a universal approach to the changes. Their motivation may have been to streamline the workload on their HR departments, but this could backfire on them quite spectacularly. It is the inclusion of the phrase “reasonable care” in the HMRC guidelines that could prove their undoing.

Firstly, applying a blanket rule on every PSC can hardly be interpreted as “reasonable care” since it’s been done in the absence of any attempt at individual assessment. It will be up to the PSC worker to challenge their change in status with the relevant NHS Trust directly. But a spokesperson for the NHS seems to believe that the interpretation of the rules is a problem for HMRC and not them – showing a troubling lack of awareness of the legislation and suggesting a healthy dose of buck-passing.

Secondly, the NHS have advised their agencies that they do NOT expect rates to increase as a result of these changes, meaning that contractors cannot try to cover their losses with a pay rise. This will make PSCs no longer viable for many workers, especially when you take into account the costs of running their businesses (insurance, business bank fees, accountancy fees, etc). The sting is even more painful when you consider that deducting PAYE and NIC from a PSC worker’s salary will NOT automatically entitle them to holiday or sick pay, pensions or other full-time employee benefits.

Thirdly, a survey conducted by contractoruk.com has found that 85% of PSC workers plan to maintain their independence by quitting the public sector altogether and moving to the private sector where the IR35 rules are unchanged. Translated into numbers of NHS contractors this could mean thousands following suit, leaving a gaping hole in NHS resources. One NHS locum has already decided that the reduction in income is untenable and is not just quitting her job but leaving the UK altogether.

It’s fair to assume that in the initial months after the new rules come into force there will a fair amount of pain to go around all parties, but it is the workers who will feel it the most. The changes make grim reading for them: not only are they taking a hit to their bank accounts, they have ignominiously been left out of the decision making process. Given the importance of the PSC workforce in the whole public sector, not just the NHS, it will be interesting to see how hard-pressed human resources departments cope with the after effects.

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