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IR35 reforms will harm public sector innovation and competitiveness, say contractors

Research from recruitment consultancy Harvey Nash highlights contractor concerns about how the forthcoming IR35 reforms will affect competitiveness and talent recruitment in the public sector

The soon-to-be-introduced IR35 anti-tax avoidance reforms will harm the public sector’s competitiveness and its ability to attract IT talent, new research warns.

According to a survey of 269 contractors by Harvey Nash Recruitment, 82% fear the changes will affect the competitiveness of the UK public sector, and 64% raised concerns about the impact it will have on innovation.

A majority of respondents (64%) also said they fear that changing the tax status of contractors, so they are treated the same as salaried workers, will make it even harder for public sector organisations to recruit and retain talented staff.

This sentiment is reinforced by other recent surveys of public sector contractors’ attitudes to the reforms, with one earlier this month suggesting that the rule change could prompt many to seek work in the private sector instead.

The Harvey Nash data backs this view, with one in four (25%) of those surveyed indicating they will pursue private sector contracting opportunities only when the IR35 changes are formally adopted by the public sector.

But this course of action may only offer some temporary respite, with 60% of contractors predicting that HM Revenue & Customs (HMRC) will also take steps to roll out the reforms across the private sector in due course.

“Should this come to fruition, the implications for innovation and competitiveness, especially in sectors such as technology, life science and pharmaceuticals where skills shortages are already causing strain, could be even more devastating than those expected in the public sector,” says the Harvey Nash report.

Incoming reform

The IR35 reforms, due to be introduced on 6 April, will see public sector organisations assume responsibility, for the first time, for deciding 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 permanent employees, and to conduct their business in a way that does not risk them being considered permanent staff.

In the lead-up to 6 April, public sector stakeholders and departmental heads have spoken about the havoc the changes are likely to cause, with many fearing there will be a mass walkout of contractors.

There are already early signs of this occurring, with about 30 contractors leaving the UK Hydrographic Office, a Ministry of Defence agency, in August 2016 following an IR35-related clampdown.

Home Office CIO Sarah Wilkinson told Computer Weekly recently that the public sector should brace itself for a “year of pain” caused by the “degradation of the contractor population” in the public sector.

Counteracting tax hikes

Industry estimates suggest the change in regulation could result in almost 90% of public sector contractors being ruled “inside IR35”, making them liable to pay out much more in employment taxes than they do now.

To counteract this, 38% of respondents said they will deliberately seek contracts “outside IR35”, and 16% said they plan to increase their rates to cancel out the increased tax liability they face.

Some 3% said they will stop contracting altogether and opt to become permanent, full-time employees, and a further 3% said they accept they will have to pay more tax after 6 April.

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Lisa Wormald, director of the Harvey Nash HR practice, said the reforms will cause widespread disruption across the public sector.

“IR35 in the public sector will be a real disruptor for HR professionals,” she said. “With austerity and cuts already biting hard, it is only going to get harder to attract and retain contingent talent.”

Danny Batey, a senior tax consultant at IR35 consultancy Bauer & Cottrell, said the changes have already caused chaos in the public sector.

“The help provided by HMRC has been far too little and far too late,” he said. “The whole sector is in chaos, with everyone looking for a quick fix.

“What is going to happen when the first payments subject to the new rules are made? With just days left before the implementation, there are still many unknowns.”

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