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Changes to IR35 regulation in the public sector have contributed to IT contractors being driven out as more than two-thirds face a pay-cut, a survey by CW Jobs found.

The IR35 public-sector change which was enforced at the beginning of this tax year was quick to stir up controversy within the Contractor community.

The changes are intended to “improve fairness in the tax system by ensuring that individuals are not able to sidestep employment taxes orNICsby working through aPSC,” however, research found that IR35 changes in the public sector have led to 71% of the IT contractors surveyed (1,100) to be left with a reduced income.

One-third decided to entirely avoid work offered by the public sector.

The measure intends to tackle ‘disguised employment’, ensuring that two people carrying out the same job are paying the same taxes as each other.

There has been skepticism around the effectiveness of the measure as IPSE, the Self-Employed & Freelancer Association, forecasted prior to the legislative reform that more than half of the 26,000 Contractors and Freelancers in the public sector would exit their contract if they were caught by IR35.

The Domino Effect

As a result of the change, IT contractors are exiting from the public-sector, resulting in IT projects hosted by public-sector bodies to suffer.

V3 reported that the measure was expected to raise more money for the Treasury, but the consequential domino effect now means that in order to tackle the decline, the public-sector may have to raise the rates of IT contractors or recruit more permanent members of staff.

“IR35 has clearly had a huge impact and it is really worrying to see IT contractors leave the public sector in their droves,” said Dominic Harvey, director of CW jobs.

“We are now facing a perfect storm of a brain drain from the public sector, questions over future project delivery, and an increase in fees from those contractors choosing to stay put: all are a real cause for concern.”

What’s the reform?

The measure now means that if a contractor chooses to work for a public-sector body, the IR35 status will be determined by the public-sector authority– rather than the contractor.

This will include “deducting any necessary employment taxes on payments to the individual’s company.”

This brings into question why a self-employed professional should be taxed similarly to an employee, but without the employment rights.

The tax reform triggered a crowdfunding campaign to challenge the legislation reform, and soon raised more than the initial target of £10.5k.

IPSE urges in their General Election 2017 manifesto, A Contract with the Self-Employed, that IR35 legislation should not be implemented to the public sector.

At Gorilla Accounting,we offer anall-inclusive accountancypackage for Contractors and Freelancersfor just £85 plus vat per month. If you have any questions, get in touch with a member of our New Business Team by calling 0330 024 0406 or emailinfo@gorillaaccounting.com.

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