Network Rail U-turns on blanket inside IR35 contractor determinations

IR35 turnaround at Network Rail 

During the course of the 2019-2020 financial year, Network Rail’s IR35 compliance strategy came under close scrutiny in the wake of its response to a freedom of information (FOI) request submitted by contracting authority ContractorCalculator.

The request confirmed that, after the IR35 reforms came into force in the public sector in 2017, 99% of Network Rail’s contractors were determined to be working inside IR35.

In its reporting of the FOI response, ContractorCalculator claimed the high number of contractors caught in-scope of the off-payroll rules could be attributed to the organisation taking a “role-based blanket approach” to complying with IR35 rules.

“This far exceeds HMRC’s estimation that roughly a third of contracts are within scope of the legislation,” reported ContractorCalculator at the time.

The IR35 reforms ushered in changes that resulted in responsibility for determining whether contractors should be taxed in the same way as salaried workers (inside IR35) or off-payroll employees (outside IR35) shifting onto the public sector organisations that engaged them.

Previously, it had been down to the contractors themselves to determine if their engagements should be classified as inside IR35 or outside IR35, based on the work they do and how their duties are performed. 

According to HMRC, allowing contractors to decide for themselves how they should be taxed was a system open to misuse, with the tax collection agency claiming some individuals may have deliberately misclassified themselves as working outside IR35 to minimise their employment tax liabilities.

However, the decision to make clients liable for determining the IR35 status of each individual contractor they engage with has prompted some organisations to respond to the additional administrative burden this places on them by making blanket determinations. 

For some, this has meant declaring all of their contractors as being inside IR35, whereas others have introduced blanket hiring bans that prohibit the use of limited company or personal service company contractors.

Speaking to Computer Weekly, ContractorCalculator CEO Dave Chaplin said it was good that Network Rail had seemingly called a stop to carrying out blanket determinations, while the DfT’s accounts suggest the department’s wider IR35 compliance strategy is working.

“It is pleasing to see that Network Rail is not blanket banning contractors, as it appeared to be many years ago when off-payroll came in,” he said. “These figures, across 11 government departments, show that the DfT has successfully coped with the new reforms and that the reforms are manageable.”

Chaplin said “commercial reasons” could have played a role in why Network Rail appeared to have turned its back on blanket assessments, but that it should give other firms pause for thought about their own approach to complying with the reforms, which came into force in the private sector in April 2021.

“Network Rail could have turned things around for a number of reasons, but for commercial reasons it may have had to start doing the right thing, which means other big firms may follow suit,” he said.

“I said years ago that the blanket bans were just the starting point for many firms, which were harbouring dusty contractors who were probably caught by IR35, and the clean and sensible route would be to press the reset button and start again.”

Tax failings uncovered

All government departments are required by HM Treasury to publish details in their annual accounts about the number of off-payroll engagements they have in place, including information about how many of these were caught in-scope of the IR35 rules.

Departments are also required to share details in their accounts of any additional tax charges they have incurred due to IR35 compliance failings.

This is how details came to light about the £87.9m unpaid tax bill the Department for Work and Pensions received following the discovery of “historic inaccuracies” in its implementation of the IR35 rules.

As reported by Computer Weekly in July 2021, the Home Office also found itself on the receiving end of a multimillion-pound tax demand from HMRC over its “careless application” of the IR35 rules.

In these cases, no further details were provided about what exactly these departments did wrong to fall foul of HMRC, with the tax collection agency repeatedly stating that it could not comment on the tax affairs of other ministerial departments.

Even so, Chaplin is of the view that HMRC could stand to be more open and transparent about the reasons why it has taken action against some organisations and not others in the interests of educating the public and private sectors about how best to adhere to the IR35 rules.

“It would be useful for HMRC to explain what went wrong at the DWP, and what went right at Network Rail, because the outcomes are very different. It will enable firms to learn lessons and ensure they remain compliant,” he added.