IR35 dispute prompts mass walkout of IT contractors from MoD agency

Changes ahead

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.”