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The IR35 reform coming into force in April 2017 is likely to lead to disruptions of government IT projects, according to Home Office chief data, digital and technology officer Sarah Wilkinson.
The regulations are being imposed to resolve tax avoidance, and HM Revenue & Customs (HMRC) aims 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.
In an interview with Computer Weekly, Wilkinson said while it is “entirely understandable” that tax avoidance gets addressed, “it is unfortunate that we’re addressing it just at the point there’s a huge demand wave post-Brexit for new work and programmes.”
“There’s no doubt in my mind that, if we’re realistic, we’re going to have a year of significant pain because you will see a degradation of the contractor population,” she said.
“It will take some time to embed new pay structures even if they were approved tomorrow. It will take some time to recruit even if we started tomorrow. So 2017 is going to be extraordinarily difficult.
“I don’t know if there is a way of imagining the IR35 problem isn’t going to have a delivery impact – but once it’s done, it’s done. That’s the positive of it.”
Contractors are already leaving their government projects. As previously reported by Computer Weekly in October 2016, an IR35-related clampdown on contractors resulted in around 30 leaving the Ministry of Defence agency, the UK Hydrographic Office, at the end of August 2016.
Technology and digital skills, particularly at middle-management level, are in high demand across government departments. Wilkinson said the Home Office, as many others, has been “enormously dependent on contractors” and therefore, the department is “running into this IR35 problem and that’s creating a lot of complexity”.
She added that although it will be “painful for a few months, it’s always surprising how fast the world really does just settle into a new regime”.
At present, the onus is on contractors to declare themselves “outside” of IR35 to avoid being taxed in the same way as permanent employees, and to conduct their business in a way that does not risk them being considered one.
Wilkinson said the current law around taxaction of contractors “has been the same for more than two decades”, and that it’s become “completely habitual – to the point where people can barely imagine it’s wrong – that contractors are worked through private services companies and not pay employee-like tax”.
Read more about IR35
- Colin Morley, professional services director at recruitment firm Harvey Nash, spells out the possible consequences of the forthcoming IR35 tax reforms and the prospect of a “hard Brexit”.
- Public sector IT contractors leave UK Hydrographic Office en masse over IR35 clampdown, Computer Weekly understands.
However, in a sector which relies so heavily on contractors, IR35 is creating difficulties.
One solution, said Wilkinson, is to change the pay constructs in different ways for digital, data and technology (DDaT) contractors. Rupert McNeil, chief people officer of the civil service, is currently working with treasury to come up with a proposal, rethinking pay for DDaT professionals.
According to Wilkinson, McNeil is trying to find out if whether there is a real business case to change the pay construct in different ways for DDaT individuals that allows for significantly easier hiring than what is currently in place, and “thereby lose a great portion of the contractors who we’re obviously paying very heavily for today”.
Wilkinson added that she hopes a solution will come quite quickly as the sector will suffer without skilled workers.
However, this in itself brings another issue, she said, because it is difficult to argue that a technologist is more valuable than a senior policy professional.
“It’s enormously difficult, politically. It’s difficult for other professions to accept that the market is such that the DDaT profession needs special treatment. But I don’t think there’s any other option,” she said.
HMRC employee tax tool seen as ‘unfit for purpose’
Earlier in March 2017, HMRC launched an online tool called the Employment Status Service (ESS), which is designed to help public sector organisations ascertain if contractors should be taxed in the same way as full-time employees. However, it has been regarded as error-prone and unfit for purpose by stakeholders.
As reported by Computer Weekly, while the roll-out of the tool was designed to bring a degree of clarity and certainty over how contractors should be taxed, research carried out by online information portal ContractorCalculator suggests its results are – in some cases – at odds with the UK’s employment laws.
Public sector IT contractors, speaking on condition of anonymity to Computer Weekly, have also expressed misgivings about the accuracy of the tool’s findings, with several questioning its ability to understand the nuances of their individual working arrangements.
In a statement to Computer Weekly, an HMRC spokesperson said the tool, coupled with the IR35 reforms, are being introduced to ensure parity in how much people get paid and taxed for doing the same job in the public sector.