Tax ruling will see contractors leave public sector work
CONTRACTORS will quit key public sector projects if the Government goes ahead with planned tax changes for the self-employed, the trade body IPSE has said.
At present, contractors determine their status and the Revenue intervenes if it thinks this is incorrect.
But from next year the Government plans to make public sector clients determine the status of an engagement rather than the contractor, making the former responsible for applying employment taxes. The plan was first mentioned in the Budget in March and a consultation launched on May 25 recently closed for submissions.
IPSE, the Association of Independent Professionals and the SelfEmployed, has estimated that more than half of the 26,000 so-called Personal Service Companies working in the public sector would quit if the proposal is implemented.
The contractors’ trade body was set up in 1999 in opposition to IR35 – a tax law that allows Revenue & Customs to treat fees paid to a limited company as if they were an individual’s salary.
Andy Chamberlain, IPSE’s deputy director of policy, said: ‘We still believe IR35 is damaging and should be abolished. But we’re concerned with the current proposal too. We believe it will cost more to implement than it will get back in tax revenue – and it’s not actually intended to make much money anyway.’
He said the Government had estimated it would raise £265 million in the first year and £65million in the second year, and added: ‘We believe it’s going to cost an awful lot of money to the public sector because of the unintended consequences.’
He said: ‘Clients and agencies are more likely to be more risk averse. And IR35 is very, very complicated. So they will simply say, “I don’t know whether this engagement is caught or not, it’s too complicated for me to understand”. So they’re simply going to say as a blanket rule IR35 applies to all engagements, as that way they can’t be made liable for anything further down the line.
‘Let’s say I’ve got 500 contractors working in a Government department – I don’t have the resources to consider each individual engagement and measure whether it’s inside or outside IR35. But many contractors will say, “I’m not getting any of the employee rights that people get when they pay employment taxes”. And they’re going to leave.’
Chamberlain predicted an exodus of contractors, which would result in delays to important projects.
IPSE said 54 per cent of Personal Service Companies would quit. Chamberlain added: ‘There are others who will stay, but only if they can put up their day rates to compensate for what they perceive as unfair taxation on the engagement. The Government is going to have to turn elsewhere. Often that will mean going to one of the big four consultancy firms, which are more costly.
‘Or it will have to pay contractors more to stay within this new system. All in all it’s going to mean they’re not going to make any money. In fact, they may lose money.’
The tax law was set up to stop ‘disguised employment’, where employers treat their staff as if they were limited companies to avoid paying Employers’ National Insurance contributions as well as sick pay and holiday pay, while the employee could also benefit by offsetting expenses against tax, for example.
IPSE argued the law – whereby the Revenue can tax the fees paid to limited companies in a manner similar to salary – unfairly affects freelancers such as designers and engineers legitimately supplying services to businesses while not being offered employment rights.
Chamberlain added: ‘We also think the issue of the public sector not having access to the specialist skills it needs is a big problem, because it means that vital public services won’t be delivered on time. We’ve spoken to quite a few members who have said that they’re leaving and that the projects that they’re working on are going to stall.
‘Public services will be hit.’