Intermediaries' legislation - IR35: What is the likely impact of the new rules for contractors working in the public sector?

ENORMOUS, in a word: contractors working in the public sector will feel the impact of the new rules on public sector contracting harshly Primarily, it will be very difficult for public sector contractors to persuade engagers (their clients) to take any other stance than the risk-averse one “because HR will be responsible for ensuring that contractors are genuinely in business of their own account and engagers could face penalties if contractors subsequently turn out to be disguised employees.”

The new rules

The new “Off-payroll working in the public sector: reform of the intermediaries’ legislation”, published May 2016, proposes giving the engager “more of a role” in helping to ensure compliance. It is understandable that this has made potential engagers / HR departments in the public sector highly nervous and it seems obvious to me that this is going to have huge consequences for contractors working within the public sector. However, the new legislation is not only going to affect contractors: the impact will be felt in the public sector itself, and it will be felt right across the UK economy. Here is a list of ten reasons why this is one of the greatest errors ever made by government.

Many HR departments in the public sector will now automatically enrol contractors on their PAYE system to protect their own backs.

2. Probably contractors will be forced to raise rates to cover their costs for being taxed at source. Click here for IR35 Test.

3. Fewer contractors will choose to work for the public sector.

4. The public sector will be starved of vital expertise and human and intellectual resources.

5. Costs will rise in providing public sector contractor services due both to the reduced number of contractors working in the market and as the result of higher rates charged by contractors to cover their losses (paying higher PAYE income tax and NI).

6. The economy will suffer, not only as the result of raised costs to public services due to higher rates charged by contractors, but also because the contractor market will cluster around non-public sector jobs ‒ unbalancing the contractor market.

7. The measures will introduce yet more confusion around IR35, “disguised remuneration”, supervision direction and control (SDC), off-payroll rules, intermediaries’ legislation (they all come down to the same thing directed at the contractor market).

8. With already overstretched human resources at HMRC, more investigations into suspected anti-avoidance will result; genuine tax evaders might get away with things because of stretched investigative resources at HMRC.

9. The skills shortage caused by contractors reluctant to work in the public sector will hurt communities, organisations, and critical public services such as the NHS and the ambulance and police service.

10. FINALLY and critically, the UK could stand to lose the exceptionally high quality contractor expertise and knowledge on which it currently relies. This could be the result of a brain drain, with highly skilled contractors leaving to go and work elsewhere, out into the wider world to the other developed and growing economies. 

In a competitive world, in a global economy, would you agree that this is looking like one of the greatest errors the government ever made?