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Contractors Believe IR35 Reforms Will Impair Public Sector Innovation and Competitiveness

The IR35 anti-tax avoidance reforms will be introduced soon, and new research is warning that they could damage the competitiveness of the public sector, as well as its ability to secure IT talent.

Harvey Nash Recruitment surveyed 269 contractors; 82% of whom said they fear that the changes could affect the competitiveness of the public sector in the UK, while 64% were concerned about the effect the reforms could have on innovation.

64% of the respondent also said they were worried changing the tax status of contractors and treating them the same as salaried workers could make it difficult for public sector organisations to acquire talented staff.

The sentiment has been reinforced by other surveys of public sector contractors and their attitudes to the reforms. One survey from earlier this month suggests the rule change could cause many contractors to move to the private sector.

The data from Harvey Nash would appear to back up this view, as 25% of the people surveyed suggested they would pursue contracting opportunities in the private sector if the IR35 changes are adopted formally by the public sector.

Making this change could offer only a little respite, as 60% of contractors feel that HM Revenue and Customs (HMRC) will take steps to bring the changes to the private sector in time.

Incoming Reform

The IR35 reforms, which are set to be introduced on the 6th of April, will see public sector organisations taking responsibility for deciding how contractors should be taxed for the first time ever.

As it stands right now, contractors need to declare themselves “outside” of IR35 so they can avoid being taxed as permanent employees and conduct their business in such a manner that they don’t run the risk of being considered permanent staff.

Public sector stakeholders and departmental heads spent the time leading up to the 6th talking about the potential havoc that will be caused by the changes, with many concerned there could be a walkout of contractors.

It already looks like this could be happening, as 30 contractors left the UK Hydrographic Office; an agency of the Ministry of Defence. The walkout occurred in August of 2016, following clampdowns related to IR35.

The CIO of the Home Office Sarah Wilkinson, suggests that the public sector is in for a “year of pain” caused by all the contractors leaving it.

Counteracting Tax Hikes

Industry estimates suggest changing regulations could cause up to 90% of public sector contractors to be considered “inside IR35”, meaning they would be left paying far more in employment taxes than they do right now.

Contractors are already planning to counteract this. 38% of those surveyed said they would deliberately look for contracts considered “outside IR35”, while 16% said that they would increase their rates in order to cancel out the increased taxes they could be faced with.

Around 3% of contractors said that they would quit contracting altogether, becoming permanent employees. Another 3% said they have already accepted the fact they are going to be left paying more in taxes after the changes are implemented.

Many are concerned not just that the changes will cause public sector disruption, but that it is already happening. They feel HMRC hasn’t provided enough help, and that there are still far too many unknowns given that the reforms are going to be made any day now.

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