HMRC denies outside-IR35 hiring ban as accounts reveal agency’s reliance on umbrella workers

HM Revenue & Customs (HMRC) has denied that it has issued a partial hiring ban on limited company contractors, after its latest set of accounts revealed a relatively large number of umbrella workers carrying out project work for the government tax collection agency.

HMRC’s accounts, which cover the 12 months to 31 March 2021, revealed that it engaged 403 temporary workers, of whom 15 were determined to be working inside IR35, during the reporting period.  

The remaining 388 individuals the agency used during that time had their engagements classified as being “out of scope” of the IR35 rules, which – as per HMRC’s reporting rules – means they were either working outside IR35 or engaged via umbrella companies.

In a follow-up statement to Computer Weekly, HMRC confirmed that the vast majority of the individuals classified as being out of scope of the off-payroll rules were employed via umbrella companies during this period, while very few were determined to be working outside IR35.

The agency declined to provide Computer Weekly with a precise breakdown of how many of its contractors are working either outside IR35 or through umbrellas.

“Given the low number of off-payroll workers who were deemed as being outside of the scope of the IR35 rules, there would be a risk that disclosure of the information could lead to the identification of an individual,” said HMRC in a written response to Computer Weekly.

However, Computer Weekly understands – through sources close to HMRC – that fewer than five of the individuals whose engagements fell out of scope of the IR35 rules were working on an outside basis.

The relatively low number of workers engaged by HMRC on both an inside- and outside-IR35 basis, compared to how many umbrella company employees it uses, has prompted contracting market sources to query whether the agency has a partial hiring ban in place.

The roll-out of the IR35 tax-avoidance reforms, in the public sector in 2017 and in the private sector during 2021, has resulted in some organisations enforcing hiring polices that prioritise the hiring of contractors that are employed via umbrella companies.

This is because companies that engage umbrella company contractors are absolved from having to determine how those individuals should be taxed, because they are – strictly speaking – employees of the umbrella company through which they provide their services.

This excuses the end-client, which in this case would be HMRC, from needing to determine how these contractors should be taxed, which also relieves them of a considerable administrative burden.

“The fact that there is a tiny, single-digit number of contractors seemingly hired by HMRC on an outside-IR35 basis suggests they have all but implemented a blanket ban,” said a source within the contracting market, who spoke to Computer Weekly on condition of anonymity.

When Computer Weekly put this claim to HMRC, a spokesperson denied that it has hiring policies in place that unfairly favour limited company or personal service company contractors within the department or its technology arm, Revenue and Customs Digital Technology Services (RCDTS).

“There is no ban on engaging off-payroll workers using a personal service company in HMRC or RCDTS,” said HMRC in a statement.

The number of temporary workers engaged by HMRC overall during the 2020-2021 financial year is vastly higher than the previous year, when its accounts reported that 55 temporary staff were engaged by the agency during the 12 months to 31 March 2020.

To this point, HMRC’s accounts confirm that the amount spent by the agency on consultants and temporary workers rose from £1.1m to £8.6m between the 2019/2020 and 2020/2021 financial years.

“This should not be viewed as a trend, but is in light of the end of the UK’s transition period with the EU, Covid-19 and the major Technology Source programme agenda we are currently undertaking,” said HMRC.

Dave Chaplin, CEO of contracting authority ContractorCalculator, said that Brexit, the pandemic and HMRC’s digital transformation workloads would give rise to lots of “classic project work” that would be typically carried out by outside-IR35 contractors.

“Classic outside-IR35 work is where contractors deliver services on a specific project, and is output-based,” he told Computer Weekly. “Yet they have a tiny number of contractors hired on an outside-IR35 basis, based on their accounts. That does not make sense.

“HMRC rhetoric around off-payroll has always been that about one-third of contractors might be operating on an ‘inside-IR35’ basis. Yet, here we are seeing only a handful of contractors out of hundreds being hired in that manner.”