The final days of the financial year are proving turbulent for the public sector, and those working on contract, as a result of the IR35 changes taking effect from April. IR35 is a long-standing measure to tax contractors viewed as ‘disguised employees’ at a rate similar to those who are employed. Determination of status since its inception in April 2000, via schedule 12 of the Finance Act, has been one of ‘self-determination’ by those who own a limited company that is paid directly by a client. In George Osborne’s 2016 Autumn Statement, he confirmed that for the public sector the client would be responsible for determining IR35 status, not the contractor, in a move that was expected to realise £185m for the public purse in FY17/18. Many believe the move was also reinforcing the strong view of the Public Accounts Committee (PAC) in April 2016 that government departments lacked sufficiently robust workforce plans to manage their spend on contractors.
Initial concerns of the contractor community were that the public sector would prove unable to correctly determine the status of contractors. This was further hampered by the delay in HMRC’s launch of an Employee Service Status (ESS) tool that would allow public sector bodies to make an accurate determination, with the release having been in the last few weeks. Even that has been subject to criticism with legal experts stressing the risks to the public sector as the ESS tool is not legally binding. ContractCalculator have put all historical IR35 court cases through HMRC’s tool: 27% of the court cases are determined as “Unknown” and, worryingly, 10% of cases were given a “pass” despite a contrary verdict from the judiciary.
So what does this mean for contractors?
The late amendment to the 2017 Finance Bill added the requirement for “reasonable care” in determining the status of contractors, which will dissuade many organisations from a ‘blanket approach’ and has been welcomed widely. Those deemed inside IR35 would likely be taxed as employees without receiving the associated benefits and rights of employment (such as pensions, holidays and sick pay). The obvious impact on ‘total reward’ for contractors will likely result in commensurate increases in fees either through an increased day rate or, in avoidance of undue scrutiny, additional billing. Those same contractors also run the risk of their accounts from previous years being placed under the microscope of revenue collectors.
What does this mean for the public sector?
The public sector is experiencing a walk out of contractors caught up in the change, placing at risk a number of Whitehall-backed IT projects. With technology and digital skills in high demand across the sector, particularly at middle management level, the coming year is looking turbulent. Sarah Wilkinson, Home Office CIO, said recently:
“There’s no doubt in my mind that, if we’re realistic, we’re going to have a year of significant pain because you will see a degradation of the contractor population.
It will take some time to embed new pay structures even if they were approved tomorrow. It will take some time to recruit even if we started tomorrow. So 2017 is going to be extraordinarily difficult.”
In a poll of around two thousand public sector contractors by tax advisor QDos Contractor, 85% of respondents said they would leave the public sector if their client deemed them to be inside IR35.
To meet the demand for niche skills, now and in the future, will certainly necessitate deliverable workforce plans, alongside a durable talent management strategy, across public sector organisations.
Adam Gibson is a global leader in Workforce Planning, creator of the Agile Workforce Planning methodology and a popular keynote speaker. He has successfully implemented and transformed workforce planning and people analytics in businesses across both the public and private sector. As a consultant, he advises company executives on how to create a sustainable workforce that increases productivity and reduces cost; he is also the head of CIPD’s workforce planning faculty.