On 6th April 2017, HMRC drastically changed the way IR35 works for public sector engagements. The amendment made to the IR35 tax system means that:
Public sector employers will have to deduct tax and national insurance contributions from contractors’ pay at source, rather than allowing them to defer and claim expenses. It means many people who work regularly in the public sector could lose almost a third (30 per cent) of their take-home pay as they will be subject to national insurance for the first time, the report said.
At this point in time, the change only applies to public sector bodies and the rule within the private sector remains unchanged. A public sector body constitutes any organisation that is legally required to respond to Freedom of Information (FOI) requests such as the police force, NHS bodies, Local Authorities etc.
In the wake of this radical change, many public sector bodies took a blanket approach and incorrectly deemed many engagements to be inside IR35. These organisations are now recruiting permanently, using zero hour contracts or plainly stating that the contract role being advertised is inside IR35 as seen on some job sites. Some public sector organisations are struggling to recruit to key roles at the first attempt. According to them, they have not been successful in hiring because of the calibre of candidates applying for these positions and reluctance of independent contractors in taking on permanent roles.
Thousands of Independent professionals have been discouraged from working in the public sector. Some have been left with no choice but to grudgingly accept the work being offered, but subject to the new rule. The question is why would the government want to tax independent professionals as if they were employees, but not give them employment rights?
According to The Association of Independent Professionals and the Self-Employed (IPSE), “By transferring liability to pay the correct employment taxes from the worker’s own company to the public sector body or agency a number of problems will be created. Independent professionals will be deterred from working in the public sector, while organisations will be less likely to “risk” engaging contractors, damaging their ability to deliver vital projects.”
The government said it was reforming the IR35 system because it estimated that 90 per cent of the individuals affected in the public sector were not paying enough tax, leading to an annual loss of £400m to the Treasury. While this figure may look huge on paper, however research from the IPSE has revealed that freelancers are the fastest-growing segment of the wider 4.8 million self-employed population, and that they contributed £119bn to the economy last year, a rise of £10bn compared to 2015. It’s a no-brainer therefore that the financial benefits from the self-employed population far exceeds how much the Treasury may think it’s losing.
It is therefore no secret that the self-employed population boosts the economy, provides jobs for a fluid workforce, provides flexibility to employers, allows for savings on overheads, creates a more balanced team structures and happy workers, as in the case of the NHS, reduces patient risks associated with sickness and absence, and the list goes on and on.
Below are only a few of the implications of this change:
- Within the NHS where there are already challenges with filling front line posts, many doctors and nurses are going to seek to work more in the private sector and this will inevitably affect the quality of care to patients says the CIPD
- Many independent professionals will be unable to find suitable jobs at the level of pay proportionate to their skills and may remain out of work for a long period. This will either force employers to increase the rate of pay on offer – something that some organisations have started doing, or lead to leaving vacancies unfilled. It suffices to say that if it’s the later, quality will be affected in the service outcomes of many public sector organisations
- Work overload may lead to poor employee relations’ environment and increased work stress, which may eventually lead to litigation. According to The British Chambers of Commerce, the average cost to employers of defending an employment tribunal claim is around £8,500
- The cost of operating payroll for approximately 26,000 personal service companies that will be affected by this change
- Abandoned projects and inability to initiate new ones to aid service improvements and transformation
- A drastic drop in the contribution made to the economy by the self-employed population and a rise in those accessing public benefits
It is concerning that the public sector will struggle to manage a flexible workforce or try to achieve one at a great cost at this time when efficiencies ought to be the focus. Independent contractors continue to migrate to their counterpart sector or may meet with a brick wall of rejection due to cultural differences. Contractors and organisations alike continue to grapple with the IR35 Digital Tool, which has not been completely free of its own implementation issues.
While these challenges are known facts, the good news is that we at Zevida Ansel can help organisations mitigate them to ensure that they continue to deliver their people agenda seamlessly. We understand some of the difficulties faced by organisations; whether public or private and we do not charge huge consultancy fees to help them tackle them. We also take care of the day-day HR needs of organisations without the need to determine the status of an independent contractor or over establish their workforce.
Why don’t you contact us and let’s see how we can add value to your teams and organisation at large?