HMRC's IR35 teams turn to the public sector as the Treasury's off-payroll list bears fruit

Contractors working in the public sector are receiving IR35 enquiry letters in numbers not seen since the rule was introduced, and the industry's advisers believe they know why.

Last May the Treasury published the results of Danny Alexander's review of off-payroll arrangements in central government, launched after it emerged that the chief executive of the Student Loans Company was being paid through a personal service company. The review found more than 2,400 people in central government departments and their arm's-length bodies engaged off payroll for more than six months at rates above £58,200 a year. New rules followed: from September, senior appointees must be on the payroll, and anyone engaged off payroll for more than six months must provide assurance that they are paying the right tax or have their contract terminated.

The review produced something else as well: a list. Every department was required to identify its off-payroll engagements, by role, duration and rate. That information was gathered by the Treasury and, according to advisers who have seen the pattern of enquiries since, has found its way to HMRC's compliance teams.

The pattern

Specialist IR35 advisers report a marked rise in enquiries opened against contractors whose recent engagements were with government departments, the NHS, local authorities and public bodies, and whose rates were at the higher end of the market. The connection is not the sector alone. It is that the sector's engagements are now documented centrally in a form that makes them easy to select for review, and that a high rate means a high potential yield if the review succeeds.

HMRC denies that anything has changed. Asked at January's meeting of the IR35 Forum whether it was stepping up compliance activity in the public sector, the department said it had always undertaken such activity and did not want the impression to be gained that the Treasury review had caused it to consider public sector risk for the first time. Forum members from outside HMRC noted the answer and the timing, and drew their own conclusions.

The wider picture

The enquiries arrive as the rest of HMRC's IR35 machinery is being rebuilt. The three specialist teams announced last year, in Salford, Croydon and Edinburgh, are now operating, with a promise of a lighter, faster process for contractors who can show they are low risk under the business entity tests introduced in May. The tests themselves remain contested. Most contractors who have scored themselves against them land in the medium or high risk bands, which the Forum's non-HMRC members say tells you more about the tests than the contractors.

For the contractor on the receiving end of a letter, the advice has not changed. Respond through an adviser, not personally. Assemble the evidence of how the engagement actually worked: the contract, the working practices, the correspondence that shows control was absent and substitution was real. The engagements now under review were chosen because they were well paid and easy to find, not because they are weak, and a well-documented case still wins.

What has changed is the environment. A contractor who took a long engagement with a government department on the understanding that the sector was a safe place to be outside IR35 was working on an assumption that no longer holds. The Treasury has said what it thinks of off-payroll working in its own back yard, and HMRC has the list to prove it.