Tax measure has ‘killed the economic viability of contract roles’

Public sector contractors are choosing retirement over working under the recent IR35 changes, signalling troubling times ahead for the public sector.

Under the amendments to the measures, introduced this April, public sector contractors and freelancers now have their tax status determined by the organisations hiring them. Those who fall inside the IR35 regime are treated as employees for tax purposes and only receive payments after PAYE and National Insurance have been deducted, resulting in significant pay cuts for many.

While experts believe it is too soon to gather specific data on IR35’s impact, multiple trade bodies say they have seen evidence of contractors leaving the public sector for private sector jobs, temporarily freezing their personal service companies, or opting for early retirement.

“We have examples of this exact thing happening – I have been contacted by members who said the IR35 measures had accelerated their retirement, and they decided to stop working as a direct result of this measure where they might otherwise have stayed in work,” Andy Chamberlain, deputy director of policy for the Association of Independent Professionals and the Self-Employed, told People Management.

“With many people leaving, either for the private sector or retiring earlier than planned, the whole purpose of IR35 is being defeated. If people are moving elsewhere or retiring earlier than planned, the government will still be getting less tax than they would otherwise. It’s a damaging piece of legislation and we are hearing an increasing number of accounts of the chaos it has caused.”

Chamberlain urged the incoming government to review what effect the IR35 changes were having once they reached the six-month mark. Although he conceded government was unlikely to row back on the measures entirely, he said he hoped to see data on how many contractors had been classed as inside IR35, how many of those had been terminated as a result and how many companies had been forced to pay more to attract talent.

Crawford Temple, chief executive of PRISM, the trade body for umbrella companies, added: “The big challenge for the public sector going forward is going to be recruiting contractors of the calibre and expertise they are going to need. The private sector is going to be far more able to agree terms with contractors that would put them outside IR35, while the public sector is under pressure to deem everyone inside IR35, leaving them at a commercial disadvantage. It’s likely people will struggle to recruit specialists, and will not have the option of upskilling existing staff, because they generally don’t have the skillset in-house.”

Meanwhile, a public sector contractor, who asked not to be named, told People Management: “The last two years have seen IR35 and dividend taxes, with the removal of travel and subsistence, pretty much kill the economic viability of a large proportion of contract roles.”

Research released in April by tax specialists Qdos Contractor predicted 85 per cent of public sector contractors would leave their current work to seek alternative opportunities because of the IR35 rule changes.

Meanwhile, an article published last week by Contractor UK warned “droves” of senior public sector contractors were opting to retire early rather than be found inside IR35.

“A significant number of mature contractors are deciding to throw in the towel and take early retirement,” director of tax advisory The Anderson Group, Barry Roback, told the website. “Others are either closing down their companies or suspending them while they seek low cost umbrellas to work their public sector contracts through.”

Earlier this week, the NHS scrapped a decision to impose a blanket IR35 measure on all its contractors, describing the move as “inaccurate” and stating it would instead carry out IR35 decisions “on a case-by-case basis”.

A government spokesman said: “Public sector organisations and contractors are free to work with each other in a manner that suits their circumstances, however it’s fair that two people doing the same job should pay the same taxes. These reforms will help ensure that happens.

“Like all tax changes, we are monitoring their effect to make sure they work effectively and fairly and we have yet to see any cause for concern.”

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