Report highlights problems caused by IR35 changes in the public sector

Over half of public sector hiring managers have lost skilled contractors as a result of changes to self-employed tax law, according to new research.

The study by the Association of Independent Professionals and the Self-Employed and the Chartered Institute for Personnel and Development found that half (51%) of public sector hiring managers had lost skilled contractors as a direct result of the changes to IR35 regulations. A further seven in ten (71%) also said they were now struggling to hold on to their contractors.

The study, which is based on responses from 867 contractors and 115 hiring managers [84% in NHS Trusts],  found that 40 per cent of independent contractors working in the public sector said they had witnessed project delays and 35 per cent said they had seen costs rise since the changes were introduced. The rate was greater for hiring managers, with more than half (52%) saying they had witnessed cost rises, delays and even project cancellations.

IR35 was introduced in 2000 with the aim of countering tax avoidance and specifically aimed at the limited company contractors that organisations hire. It is designed to combat ‘disguised employees’ – which HMRC believes would be employees of the client if they did not work through a limited company. New legislation introduced for the public sector in April moved the onus of evaluating IR35 tax status from the worker’s own company to the public sector body hiring the worker. These are now liable for collecting taxes and ensuring compliance.

The study says changes to IR35 have also caused damage by adding a significant administrative burden across the public sector. Eight in ten (80%) hiring managers said they had seen a substantial increase in the workload involved in engaging and paying contractors.

Three-quarters of hiring managers say it is now harder to recruit contractors.  The Government is considering whether to extend the policy to the private sector.

Chris Bryce, IPSE’s CEO, said: “These figures are a resounding retort to HMRC’s deeply flawed research on the impact of the changes to IR35 in the public sector. They confirm what we have been hearing anecdotally for a long time: these changes just have not worked. In fact, they’ve caused serious damage right across the public sector, stalling major TfL projects and even contributing to the NHS staffing crisis.

“But the public sector is only a fraction of the size of the private sector. If the Government, against all reason, goes ahead with its plan to extend the changes to IR35 there, the consequences will be far worse. It would be nothing short of a disaster. For the good of the self-employed, for the good of businesses across the UK, and for the good of the economy, the Government must take heed and reverse these dangerous, reckless plans.”

Charles Cotton, Senior Performance and Reward Adviser at the CIPD, added: “Our research suggests that the way the IR35 tax changes have been implemented has had damaging unintended consequences for the public sector. HR professionals have said they are finding it harder to recruit and retain skilled contractors, which is contributing to project cost rises, projects being delayed and, in some cases, projects even being cancelled. It’s important that the Government is in genuine listening mode during the consultation on its plans to extend the IR35 changes to the private sector to ensure that the potential implications are fully taken into account. If necessary there should be a complete rethink of the private sector roll-out.”

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