The public sector is set to lose out on contractors because of changes HMRC is making to IR35 legislation. New findings suggest that over three-quarters of limited company contractors are planning to quit the public sector.
In a survey of 2,000 contractors, 85% are planning to leave their contract at a taxpayer-funded body. They instead plan to move to the private sector by the time the changes come into place in April. Over the last few years, IR35 has become one of the least favourite terms for many freelancers and contractors and the new changes are not being welcomed by many.
What is IR35?
IR35 was introduced in April 2000 to combat the problem of employers trying to avoid PAYE tax, National Insurance contributions and paying employee benefits by hiring contractors through intermediary companies.
If IR35 is deemed to apply to a contractor, the intermediary then has to use PAYE and pay National Insurance contributions as they would an employee.
From April 2017, the responsibility for determining IR35 status within the public sector will be down to whoever is paying, rather than the contractor themselves.
If a contractor is decided to be working within IR35, the recruitment agency must deduct Income Tax and National Insurance from the contractor’s fee before they get it. Payments received will be net pay, not gross pay like an employee.
Contractors who work within IR35 in the public sector also won’t be able to receive the 5% expense allowance.
Some recruitment agencies want contractors to use a PAYE umbrella company to avoid having contractors’ statuses assessed. This will allow them to avoid the operating costs of PAYE and National Insurance.
For private sector workers, no changes have been made so far. Though people predict that the same changes will be rolled out, HMRC say they have no plans to subject private sector workers to the same rules.
For now, plenty of contractors are making plans to leave the public sector to avoid these new changes. However, this will mean that the public sector could be missing out on valuable skills and talent.