IR35 research: 85% of contractors will quit public sector if tax status changed

The soon-to-be-introduced IR35 anti-tax avoidance reforms could prompt a mass walkout of IT contractors from the public sector, research suggests.

A poll featuring the responses of 2,000 contractors suggests many would leave the public sector if they were made to pay the same tax as salaried workers. This could have potentially huge consequences for the future of many Whitehall-backed government IT projects.

Some 85% of respondents said they would cease working in the public sector if the organisation they worked for concluded that they should be considered “inside IR35” and so taxed in the same way as salaried workers.

Meanwhile, 49% said they thought the output of government departments would suffer if, as predicted, the changes lead to large numbers of contractors exiting the public sector.

The changes, which are set 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 one.

As previously reported by Computer Weekly, the changes are known to have already prompted walkouts at a Ministry of Defence agency, months before their formal introduction.

The roll-out of an HM Revenue & Customs (HMRC)-backed online tool to help public sector organisations ascertain whether an individual should be “ruled in or ruled out” of IR35 sparked controversy earlier this month, following reports that its results were “error-prone”.

Seb Maley, CEO of tax advisers QDos Contractor, who conducted the research, said the changes could have knock-on consequences for the entire public sector if, as predicted, they lead to staffing shortfalls.

“Whether it’s the NHS, HS2 or government departments for that matter, it’s fair to say that every public sector body or project will be worse off should there be a walkout,” said Maley.

“The threat not just to the public sector, but UK contractors and agencies, which makes it all the more important that well-educated, expert decisions are made when it comes to setting IR35 status.

“Changes are a matter of weeks away, and HMRC’s tool for determining IR35 status has only just been released. Questions remain over its effectiveness and accuracy, and, put simply, people are still wondering what to do.”

Computer Weekly contacted HMRC for comment on the survey results, and received the following statement: “Public sector organisations and contractors are free to work with each other in a manner that suits their circumstances, however it’s fair that two people doing the same job should pay the same taxes. These reforms will help ensure that happens.

 “Like all tax changes, we are monitoring their effect to make sure they work effectively and fairly and we have yet to see any cause for concern.”...........................................................................................