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Several major IT projects at a Ministry of Defence (MoD) agency are on hold after a mass walkout of IT contractors in a dispute about their tax status, Computer Weekly has learned.
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Around 30 out of a possible 32 IT contractors are understood to have deserted the UK Hydrographic Office (UKHO) since the end of August 2016, with the remaining workers left to prioritise dealing with day-to-day tech support issues, it is claimed.
The organisation is responsible for the collection and supply of hydrographic and geospatial data to the Royal Navy and merchant shipping industry.
The dispute centres around whether contractors are eligible to be taxed under controversial rules known as IR35. Freelancers using IR35 are treated as off-payroll, and are typically employed by a limited company of which they are a director – and as such, avoid PAYE tax on their contracted earnings.
However, HM Revenue & Customs (HMRC) wants to clamp down on contractors abusing the system by making public sector bodies treat them as salaried workers unless they can prove they conform to IR35 rules.
“Public sector departments usually tell contractors if you get an independent contract review [to prove IR35 eligibility], we’re happy and that is assurance enough for us that you are paying the correct tax,” a source, working in the public sector contractor community, told Computer Weekly.
“But UKHO started to say recently they wouldn’t accept independent contract reviews as an assurance any more, and they started to make tougher demands to the point it became a lot harder to be a contractor working there.”
According to UKHO sources, contractors were told they could side-step the assurances issue by agreeing to be taxed in the same way as a regular employee or cease working there from 1 September 2016.
“The vast majority of contractors did not want to follow the new arrangements and, along with the considerable bad feeling at the way it was announced, they left at the end of August,” a source told Computer Weekly.
The UKHO declined Computer Weekly’s request to confirm the number of contractors who exited the organisation over the changes, but said off-payroll workers currently account for around 5% of its total workforce.
Sources working at UKHO said the MoD told contractors of its plans in May 2016, and initially gave them until July 2016 to agree to the terms of the new regime or leave the organisation. This deadline was later extended until August 2016.
The Association of Independent Professionals and the Self Employed (IPSE), which represents around 26,000 public sector off-payroll workers, is known to have written to the UKHO in June after several contractors complained about its change in stance on contract reviews but received no response.
The move is being interpreted as a bid by MoD to pre-empt HMRC’s forthcoming IR35 tax avoidance reforms, which will see public sector organisations assume responsibility for determining how limited company contractors should be taxed.
At present, the onus is on contractors to declare themselves “outside” of IR35, to avoid being taxed in the same way as a permanent employee, and to conduct their business in a way that does not risk them being considered one.
The proposals are the subject of an ongoing HMRC consultation, and the government is widely tipped to use the Autumn Statement on 23 November to confirm whether or not the reforms will be formally adopted across the public sector.
In a statement to Computer Weekly, a UKHO spokesperson denied its change in tax status assurance policy is part of push to adopt the IR35 reforms head of schedule.
“We have not implemented any early changes to the IR35 rules – the government is still consulting on this,” the spokesperson said.
IR35 under review
The IR35 reforms are designed to clampdown on tax avoidance by off-payroll workers and their implications have been widely debated since the former chancellor, George Osborne, mentioned the plans during the 2016 Spring Budget.
Several contractors told Computer Weekly about their misgivings regarding the public sector’s ability to accurately determine how limited companies should be taxed, and fear being incorrectly classified “inside IR35” as a result.
“There is a concern the public sector clients will simply say it is too complex for me to work out if each one of my contractors is inside or outside IR35 and – because I want to be compliant – I’ll just say they all are inside,” one contractor told Computer Weekly.
“Contractors will get lumped into a higher tax bracket they feel does not apply to them, and will need to consider increasing their day rates to cover the resulting fall in take-home pay.”
A recent IPSE poll, featuring responses from 829 contractors about their attitude towards the IR35 reforms, revealed around a third (31%) would cease working in the public sector altogether if the changes are introduced.
Meanwhile, 23% said they would move to terminate a current public sector contract if made to pay the same level of tax and National Insurance as employees, prompting IPSE to warn the government about a possible public sector brain drain should the IR35 reforms go ahead.
“What we’ve said [to the government] is if you’re not careful and push these things through in too much of a stringent way, you’re going to drive contractors out of the sector and end up with departments where no-one is doing the work and you have to resource all the projects,” Andrew Chamberlain, deputy director of policy and external affairs at IPSE, told Computer Weekly.
“If it imposes rules that contractors cannot work with, they will leave the public sector and they will find work elsewhere, and the public sector will be robbed of the resources they have come to rely on, and public services will suffer.”
Read more about IR35 and contractors
- The High Court rules against an IT consultant who was fighting a £99,000 tax demand for work he completed on behalf of motoring organisation the AA.
- The Inland Revenue’s IR35 tax, which requires IT contractors to be treated as full-time employees for tax and national insurance purposes, is dealt a blow as the Special Commissioners for Tax rules in favour of a freelancer at Ford.