What HMRC’s proposed IR35 tweaks mean for contractors in the public sector

HMRC is aiming to clamp down on contractors and self-employed workers who are not paying the correct amount of tax. Their efforts could see 90% of contractors either move to the private sector or increase their fees to compensate for the costs.

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The government is currently deciding whether to shift the responsibility for intermediaries’ legislation compliance – known as IR35 – from the individual contractor to a public body or employment agency.

These reforms will result in contractors having to pay the same amount of tax as permanent employees, without receiving any of the associated benefits, such as sick and holiday pay.

In the 2016 Budget Statement, George Osborne announced that those who use the services of any contractors working through limited or personal service companies will be required to pay income tax and National Insurance on the contractors’ behalf. The rule will also be applicable where a contractor works through a public sector body or agency. It is proposed to come into force in April 2017.

If this goes ahead, HMRC hopes to raise an additional £400m by targeting the 20,000 public sector contractors who are currently not paying the correct tax under IR35 rules. It is estimated that only 10% of those who should apply the rules do so.

A recent survey of 250 public sector IT contractors showed that only 10% of respondents would pay extra tax. The remaining 90% stated that they would either go into the private sector or increase their fees to compensate for the extra tax. A fee increase to the public sector could be as much as 30% if a contractor wishes to maintain the same level of income after being deemed to be inside IR35.

If HMRC chooses to proceed with the proposed clamp down, government could end up losing out on £115m in projected tax revenues. In addition to this, it could face a £610m rise in costs per year to re-hire contractors who move to the private sector.

In the case of an HMRC investigation resulting in a negative outcome, it is essential to have insurance cover in place to help with both the cost of an audit (professional assistance) and the possibility of a tax liability that may arise.

We have partnered with a law firm to help provide our clients with comprehensive advice. Follow this link to get free quote for contractor insurance, as well as the option to have your contract reviewed for IR35 purposes for only £40 (usually £199).

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