Contractors could be forced to turn public sector work away

30th August 2016 | News

Self-employed contractors may be forced to leave public sector projects if the Government goes through with its planned tax changes for the self-employed, warns trade body, the Association of Independent Professionals and the Self-Employed (IPSE).

Currently, contractors determine their status and HM Revenue and Customs (HMRC) intervenes if it believes the status to be incorrect.

However, from next year, the Government is aiming to make public sector clients specify the status of an engagement rather than the contractor, making the client responsible for applying employment taxes.

The IPSE believes as many as half of the 26,000 Personal Service Companies operating for the public sector would decide to quit if the proposals are fully implemented.

The IPSE was created back in 1999 to voice the disapproval of IR35 – a tax law that enables HMRC to treat fees paid to a limited company as if they were an individual’s salary.

Andy Chamberlain, deputy director of policy, IPSE, said: “We still believe IR35 is damaging and should be abolished.

“But we’re concerned with the current proposal too. We believe it will cost more to implement than it will get back in tax revenue – and it’s not actually intended to make much money anyway.”

Mr Chamberlain said the Government hoped to raise £265m from the new proposals in the first year and £65m in the second year.

“We believe it’s going to cost an awful lot of money to the public sector because of the unintended consequences,” added Chamberlain.

“Clients and agencies are more likely to be more risk averse. And IR35 is very, very complicated.

“So they will simply say, ‘I don’t know whether this engagement is caught or not, it’s too complicated for me to understand’. So they’re simply going to say as a blanket rule IR35 applies to all engagements, as that way they can’t be made liable for anything further down the line.

“Let’s say I’ve got 500 contractors working in a Government department – I don’t have the resources to consider each individual engagement and measure whether it’s inside or outside IR35. But many contractors will say, ‘I’m not getting any of the employee rights that people get when they pay employment taxes’. And they’re going to leave.”

The IPSE predicts 54 per cent of Personal Service Companies would quit, with the mass exodus of contractors potentially delaying key public projects.

“There are others who will stay, but only if they can put up their day rates to compensate for what they perceive as unfair taxation on the engagement,” said Chamberlain.

“The Government is going to have to turn elsewhere. Often that will mean going to one of the big four consultancy firms, which are more costly.

“Or it will have to pay contractors more to stay within this new system. All in all it’s going to mean they’re not going to make any money. In fact, they may lose money.”