HMRC denies IR35 reforms to blame for public sector IT project delays and cancellations

HM Revenue & Customs (HMRC) denies the IR35 tax avoidance reforms are directly to blame for any delays to public sector IT projects, despite research suggesting differently.

A ContractorCalculator survey, featuring responses from more than 1,500 contractors, claims 79% of public sector IT projects have been delayed or cancelled since the IR35 reforms came into play on 6 April 2017.

The changes have seen public sector organisations assume responsibility for deciding whether limited company contractors should be taxed in the same way as permanent employees (inside IR35) or off-payroll staff (outside IR35).

Contractors were previously responsible for self-declaring their engagements, with the reforms introduced in April 2017 as part of an HMRC-led clampdown against contractors who effectively abuse their off-payroll status to avoid paying PAYE and national insurance contributions.

Since the revised rules came into force, 76% of public sector departments have lost “highly-skilled” off-payroll staff, the ContractorCalculator research continues, with 37% of those listed as IT contractors exiting the public sector.

“IT contractors are in very high demand and could not be forced into false employment, so they voted with their feet,” said Dave Chaplin, CEO and founder of ContractorCalculator.

“With Brexit and other challenges right around the corner, HMRC has chosen to shoot the public sector’s IT capability in both feet by sparking a contractor exodus.”

A Computer Weekly investigation into the impact of the reforms on public sector staffing levels, published in June 2017, suggests some departments lost up to 40% of their IT contractors in the wake of the IR35 reforms.

Some departments appeared to take pre-emptive action, with Computer Weekly reporting as far back as October 2016 that 30 out of 32 IT contractors working at the UK Hydrographic Office, a Ministry of Defence agency, left after having their off-payroll engagements ruled “inside IR35”.

But it’s not just IT contractors who are turning their backs on the public sector, said Chaplin. “IT is not the only resource the public sector is starved of – the NHS is also struggling. It’s a shambles which has cost our public services dearly to the tune of millions of pounds,” he said. 

“We cannot underestimate the impact of the changes on public healthcare nor the aggravating effect the changes have had on departments in need of project managers.”

HMRC, however, rubbished the survey’s findings in a statement to Computer Weekly and claims the results are based on an “unrepresentative sample” of contractors.

“There is no evidence of a drift from the public sector and there have been no delays to IT projects due to the new rules. There is no change to contractor pay other than to make sure the correct tax is paid,” an HMRC spokesperson told Computer Weekly.