NICs increase is least of the tax worries for public sector IT contractors as IR35 fears grow

The otherwise obscure topic of taxation for the self-employed hit the headlines this week after chancellor of the exchequer Philip Hammond announced in his latest Budget a rise in national insurance contributions (NICs) – but for many self-employed IT professionals, tax laws have been at the forefront of their mind for some time.

The IR35 rules that determine whether an IT contractor should be treated as a company or an employee for tax purposes have been controversial since their inception as long ago as 1999. The aim is to prevent tax avoidance by individuals who effectively work full-time for one organisation, but are paid as a service company, not on regular PAYE. Such contractors typically pay themselves a low wage, but take high dividends after their company is taxed at lower corporate rates.

The new NIC rules – if they survive a Tory back-bench backlash – will hit every IT contractor. But for self-employed IT experts working in the public sector, there’s a bigger concern. As of April, new HM Revenue & Customs (HMRC) guidance comes into force, whereby the public body commissioning services determines if a contractor falls within IR35 – and hence should be treated as an employee on PAYE.

There is no doubt some IT contractors have been stretching the rules by declaring themselves to be outside IR35. You’d be surprised how many names appearing on Whitehall organisation charts, with job titles and permanent desk space, are actually self-employed.

It’s no secret that many IT freelancers are deserting government over the rule changes – which do not apply in the private sector. Moving onto PAYE represents a significant pay cut, when many of those affected claim they should not be classified like staff.

Government already faces a significant digital skills shortage. Many departments struggle to recruit IT experts – especially at senior and middle management levels. As a result, they turn to freelancers in the short term – but the IR35 changes threaten to scupper that route to accessing much-needed skills.

Home Office IT chief Sarah Wilkinson was brutally honest in saying that IR35 reform will have “significant delivery impact” on critical digital projects. “We’re going to have a year of significant pain,” she said.

This is going to be a huge issue across the public sector – just as the new digital transformation strategy takes effect, and right in the midst of Whitehall preparing for Brexit. Many important digital programmes will be delayed, some with political implications.

HMRC shows no sign of backing down, and as a result the public sector risks a mass exodus of contractor resource. For those affected, NICs will be the least of their worries.