The Great Public Sector Exodus

The Government is considering a proposal that will change the way IR35 works for contractors in the public sector. Along with the wider business community, IPSE is fighting the plan, which the Government is planning to bring into force from April 2017. Government wants to make public sector organisations, or the agency, determine the IR35 status of an engagement, as opposed to the contractor’s company. The client/agency will then be responsible for applying employment taxes to those businesses that are deemed to be ‘caught’ by the new rules.

We argue that the proposal will damage not only the 26,000 Personal Service Companies (PSCs) that operate in the public sector in the UK, but their clients and agencies too. Ultimately, it will put the economic contribution of the flexible workforce at risk. Not to mention make an already over complicated tax system even more complex.

A public sector free from contractors

IPSE recently conducted a survey among independent professionals that aimed to understand how the proposed change might affect their business. This article provides results as at 25th July 2016, compiled from the responses of 829 IPSE members and non-members who have worked on public sector contracts in the last two years.

The results are telling. Nearly a third (31%) indicated that they would no longer work on public sector contracts at all – this is without waiting to find out whether they will be required to pay the same tax and National Insurance as an employee. Another 23% said that if they have to pay tax like an employee, they would terminate their public sector contracts. It’s no surprise that only 2% would continue taking public sector contracts if the proposal is implemented.

It doesn’t end there. Out of those who indicated they would terminate their public sector contract or not work on public sector contracts at all, 81% would seek out work outside the public sector instead.

The cost to Government

As a result, public services will suffer. Public sector bodies, seeking to salvage and maintain projects, will have to find alternative resources. This could be achieved by taking on more employees – however, employment is usually inappropriate for projects that have a fixed end. This would also cause significant extra costs and responsibilities. This includes holiday pay and pension entitlements, and the ability to cut the cost of the worker once the project is completed. It is likely that public sector organisations will have to look towards staff from the ‘big four’ consultancies. Yet this will dramatically increase the overall costs, as these consultants come at a premium well above the average cost of engaging with a PSC.

Furthermore, almost four in ten (39%) indicated that they would increase their day rate to compensate for any additional tax liability if the proposal is enacted. So even if public sector clients do not go for the big four, they’ll find that PSCs have suddenly upped their day rates. This will again increase the cost and strain on public funds – with no benefit to the exchequer.

Another disheartening finding from the survey was that of those who’ll have to leave the public sector if the proposal was enacted, 5% would retire earlier than planned. Without even taking into consideration the pain to families this may cause, it’ll also reduce the economic contribution of PSCs and result in less tax being paid.

Legal action

The survey also considered treatment of taxes and employment rights. The vast majority felt that applying employment taxes without the employment rights to go with it is unfair. When respondents were asked how they would feel if they had to be taxed as an employee, but were not given employment rights, 19% said they would consider taking legal action against the client, and over half (51%) would challenge their client on the decision.

Now the cost of a tribunal varies – but it is very rarely an insignificant amount. If this proposal is implemented, HMRC can expect this leading to plenty of appeals. And HMRC’s track record of winning tribunals isn’t the best.

Many PSCs will find themselves unfairly judged to be ‘inside IR35’ as public sector clients will look to be more risk-averse. PSCs will then challenge the decision, leading to very substantial costs. It’s very telling that only 3% of respondents would think the decision is fair and would take no action.

Where's the guidance?

Those that do not take legal action, but look to challenge the client, will need support and guidance on how to do so. And obviously, the public sector bodies themselves will need advice on how to determine whether their clients are caught by IR35. The Government’s consultation document states that 26,000 PSCs will be affected – so that’s 26,000 decisions that will need to be made on the status of each engagement.

It's very telling that only 3% of respondents would think the decision is fair and would take no action

This will require a vast amount of work and resources, and carry a huge cost burden for HMRC. HMRC’s phone line for tax service is notoriously poor – so there is a chance this will bring it to the brink of collapse.

The results of our survey show that if this proposal is adopted by the Government, it is likely that most PSCs will stop contracting in the public sector, hike up their rates to compensate for the additional tax burden, or take legal action against the public sector body. No good will come out of its implementation.

IPSE is doing all it can to fight this proposal. We’ve visited the Prime Minister, we’ve held roundtables with HMRC and our members, we’ve submitted a consultation response to government, we’ve appeared in the media, and we’ve written several blogs on the subject.

We need to leave this Government in no doubt of how damaging the reform will be.

Take a stand with IPSE, and let’s ensure the government abandons this proposal. 

A version of this article first appeared in the IPSE Magazine

Tax, Research, Policy

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