IR35 – off-payroll rules for intermediaries – what has been the impact on the public sector?

The IR35 reforms for the public sector, otherwise known as off-payroll rules for intermediaries, has caused a great furore in the organisations that rely on contractors, and put the cat among the pigeons for contractors themselves.

Everyone’s feeling it

The public sector is feeling the effects of the reforms: since the new rules for intermediaries in the public sector came into force on 6 April 2017 there has been, as predicted in our previous article on IR35: Off payroll sector workers, a mass exodus of contractors and temporary workers from the public sector to the private sector.

The private sector is feeling the effects of the reforms as well: since the new rules came into force the private sector market has started to become somewhat flooded. This is good for the private sector as it can drive down rates of pay, but it’s not good for contractors and not good for the economy generally.

Contractors feeling the brunt in the public sector will manifest in the private sector; this will cause the aforementioned flood, then in time the rates of pay will be driven down and the skills the UK owns, in the IT sector in particular, will be driven from here to elsewhere in the world where the rates of pay are better.

The public will feel the brunt then as well: not only will the skills shortage have an effect on the economy, but the shortage of expertise will cause delays and errors. Costs will rise in the public sector. All of this is going to affect the economy and this is going to have an impact on everybody.

Blanket impact was predicted

As predicted the IR35 reforms for the public sector, otherwise known as off-payroll rules for intermediaries has hit the IT and technology industry more than any other sector of contracting. IT and technology have borne the brunt of the exodus and resultant skills shortage in government departments and generally in the public sector, in the NHS, prisons, schools, courts, etc., with reports that some government projects in the public sector are facing delays and rising costs as well.

Anyone with even a modicum of knowledge about economics will realise that if more than three-quarters of government departments have lost IT contractors due the changes in off-payroll rules for intermediaries since April 2017, as a result, said highly skilled IT contractors working in the public sector will be demanding higher rates of pay to make up for increases in tax and National Insurance payments. It is quite right in my view that IT contractors who agree to be paid via PAYE demand higher rates and it is quite right that they pull out of the job should their demands not be met.

However, those moving over to the private sector might now find that private sector contracts offer less favourable rates as the exodus of especially IT and technology contractors from the public to the private sector is beginning to drive down the rates of pay because there is more skill in the private sector, where the same rules don’t apply (yet).

Limited company contractors have abandoned the public sector in droves, why wouldn’t they when they no longer have the power to determine their own IR35 status? This is not good for the public sector, it is not good for the private sector; and it is not good for the contractors, or for the economy or for society as a whole.

What is becoming evident is that the changes are having negative results, which will filter down, as these things tend to do over time. Let’s wait and see, but here are some of the stats for now.

First off, an overwhelming number of contractors asked did not trust HMRC’s online assessment tool to determine whether they were inside the new public sector rules.

Other key findings include:

1. 76% of departments in the public sector have lost highly skilled contractors;
2. 71% of projects have been delayed or cancelled;
3. 27% of contractors in the public sector left after the reforms were put in force;
4. 38% of contractors were not replaceable;
5. 24% of projects lost at least 50% of their contractor workforce.

The sectors most affected have been IT and healthcare with around 37 per cent of the contractor workforce leaving NHS contracting. The effect of this has seen almost 80 per cent of IT projects suffering severe delays. The NHS, which is the most reluctant of the public sector employers to offer contracts outside IR35, has lost a quarter of its flexible, highly skilled workforce.

Smothering an industry with a blanket

Contracting in the public sector is no longer attractive, but it is a vital, critical, central part of how the public sector delivers services to the public! The reforms have led to over 50 per cent of IT contractors stating that they actively avoid taking contracts in the public sector. It is catastrophic that 21 per cent almost a quarter of IT contractors that previously worked in the public sector now say they will never work in the public sector again.

But still HMRC will not listen, even with these and similar survey findings, even with warnings from the sector itself and business and industry experts, even with forecasts and reports by academics pronouncing disastrous consequences – among whom are experts in economics, employment, society, ethics, etc. – HMRC will not listen. It states that there is no evidence to suggest a mass exodus of contractors from the public sector; what delays? HMRC asks.

Please see the DNS guide to IR35.

Please see more on our flexible umbrella looking for better return which means you’re effectively on the payroll and the umbrella makes the relevant tax payments and deductions on your behalf. We will take the strain of IR35 assessments and handle the tax for you.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.