IR35: gaming the tax and NICs system

Please note: this article does not provide legal advice.

This article is part of a suite - a whirlwind tour to get up to speed on IR35:

  1. Background to assessment. HMRC's intent, guidance, CEST tool - plus legal cases.
  2. Making employment status decisions. The big picture on employment status decisions.
  3. HMRC examples - Alan and Jemima. Quite simple, no CEST.
  4. Examples - Chenguang and Kaye. Two examples, including using CEST.
  5. CEST criticisms and responses. CEST can be helpful, despite the criticisms.
  6. Gaming the system and pressure. HMRC are targeting these.

Gaming and pressure

In the private sector, reforms which go live in April 2021 mean that the responsibility for determining the correct employment status - and consequently the right amount of NICs and tax the contractor should pay - transfers from the contractor to the hirer.

We first look at how the tax and NICs system could be “gamed”. Based on what happened after the corresponding public sector reforms in 2017, we then look at times when there might be pressure to assess someone as “outside IR35”. Of course some areas such as blanket policies work the other way. Perhaps some entities might even find HMRC’s stance intimidating.

Hirers explain their rationale for using contractors and other temporary workers:

We are committed to maintaining in-house capacity but it is recognised that, with a significant element of our activity being project based with peaks and troughs in requirements, making the best use of the temporary labour market is necessary.

Many of our programmes require specialist input on a temporary basis and it is not always cost-effective to permanently recruit such skills.

Source: NHS Digital report and accounts 2018-2019

As we will see, NHS Digital fell fouls of HMRC’s judgements.

Gaming the system

Parties could use “disguised employment” to save tax and NICs and share the benefit. I do not suggest what proportion of contractors behave(d) inappropriately: HMRC imply that there is mass non-compliance, while some hirers and all contractor trade bodies would deny this strongly.

Aside: A good test is what happens if things go to court, though a small contractor may not be able to pay the legal defence fees. The Primary Path defeat of HMRC suggests that HMRC can pursue cases even where they are badly wrong - according to the tribunals.

The contractor could claim “outside IR35” status, managing his tax and national insurance as described below. Hirers could gain a more flexible workforce and keep the headline employee count down. What’s more, any tax risk could be left with the contractor.

Some companies use(d) contractors on long term contracts for business as usual work. It may be complex e.g. IT “maintenance”, writing risk management reports, carrying out remediation calculations, but the reality is that there will be an ongoing requirement for the same work for years.

Sometimes arrangements were in place for 2-5+ years and were arguably gaming the system. The example below shows such an arrangement. We ignore the point that, depending on the specific circumstances, HMRC might successfully challenge such an arrangement.

Gaming: how a contractor can increase his net pay

More options

The description below is set up to sound as though the contractor secures most of the tax and NICs savings and thereby increases his net pay. In practice things can be more complicated.

We will refer to the hirer as the "company" and the worker as the "contractor", who may set up his own limited company or may be technically self employed.

Consider an employee “A” who works in IT and earns £50,000 p.a. before tax.

In broad terms, the tax and National Insurance Contributions (NICs) position is:

Additionally the employer makes pension contributions to (say) match those of the employee - and perhaps more. The employee gets holiday and other benefits.

Here’s how the employer and “A” could enter into an arrangement which is financially neutral for the company, but increases A’s net pay:

But now look at how A benefits:

Depending on the tax status of (e.g.) a spouse this “scheme” could be extended, perhaps to gross pay of £100,000, which is split between the two. That’s before you start getting really creative.

A different way to play the game

Where a hirer can secure a large part of the tax and NICs savings - e.g. it can save all the employer NICs for itself - there may be an incentive to classify workers as self employed.

Some companies’ business models seem benefit from this. As Legal Business states the judgment … goes to the fundamentals of Uber’s business model.

The rest is outside the scope of this suite of articles.

The new rules: extra pressure since 2017

Here’s the basic position: to simplify its life and (supposedly!) remove its tax risk a company decides to re-classify all its contractors as “inside IR35”. It finds that some of its contractors are no longer interested in its contracts. This applies to its most valuable contractors.

There’s no surprise here; contractors aim to do interesting work for an attractive reward. If the latter part is arbitrarily removed - i.e. enough of the hirer’s peers argue that they can justifiably not follow the same approach - competitors become more attractive hirers.

The simplification and supposed de-risking comes up against commercial pressures. To an extent this is what has happened in the public sector, since IR35 reforms were introduced in 2017.

It’s possible that an initial blanket decision can be replaced by special concessions, with any assessment not satisfying HMRC’s reasonable care requirement.

Perhaps such pressures resulted in a £4.3m IR35-related tax bill for NHS Digital. The key features here seem to be that NHS Digital:

From 2019 NHS Digital adopted a different process. They make an initial internal assessment, with those deemed to be outside IR35 being reassessed externally, although a spokesman also said that CEST is still sometimes used. See pages 101-102 of the NHS Digital report and accounts 2018-2019.

CEST could, of course, be regarded as an external tool. Presumably HMRC contended that the CEST inputs were wrong and/or NHS Digital had not taken reasonable care.

What’s the explanation?

It is hard for us to see the actions of NHS Digital ... through anything but the prism of market forces. Viewing it through such a lens provides both useful insights into the health service digital unit’s activities related to April 2017’s off-payroll rules, and foreshadows what we think might happen in light of April 2020’s off-payroll rules...

Source: Untangling how NHS Digital got IR35 status wrong

My summary of the above article is:

Within this context, NHS Digital’s sudden decision to throw the towel in and cease resisting HMRC is more understandable. Indeed, it is entirely possible that this move may be designed to send a signal to the private sector.

It’s being suggested that NHS Digital has little need to maintain its opposition to the general public sector stance – the intent may now be to sew fear in private sector clients’ minds by staging a high profile capitulation to HMRC.

Additionally, NHS Digital is likely to watch how private sector organisations behave and, if they follow the lead of many of the banks, we are likely to see NHS Digital hardening its stance yet further.

Did NHS Digital feel under pressure to “tweak” HMRC inputs? Accountingweb speculates:

Whilst we do not know the full facts in the NHS Digital case, in my experience, engagers have identified ways of achieving favourable CEST results. If this is looked at on review by HMRC, the picture painted often does not 100% reflect the terms of the actual engagement.

Source: NHS Digital tax bill: Is the CEST tool on life support?


I hope these reforms help to stop gaming. The extent to which they affect non-gamers will depend on perceived risk and a balance of supply and demand, as has always been the case. It will be interesting to see how things play out for NHS Digital, banks and other private sector users of contractors.