According to the recent survey by the Recruitment and Employment Confederation (REC), public sector employers do not approve the changes to the monitoring and reporting of skilled contractors’ tax status that the government is currently proposing.

The survey, based on the feedback from 95 public sector HR managers, highlighted that 69.5% expressed fears that the government’s changes would have a negative impact on NHS, councils and schools, by increasing their wage bill or damaging their ability to attract talented individuals and afford the senior contractors and interims they need to manage local public services.

Furthermore, when asked about their ability to assess if a contractor falls within the scope of IR35, 12.6% said they felt the rules were unclear and just over 60% said they were very or somewhat confident in making those judgments.

Meanwhile, the Association of Chartered Certified Accountants (ACCA) also warned that the reforms will “disproportionately affect a sector whose continued flexibility and profitability will be an essential foundation for the future economic security of the country”. ACCA highlighted a “significant risk” as public sector bodies are likely to distance themselves from the risk of liability by engaging only large, publicly listed outsourcing service providers.

What are the proposed changes to IR35?

The intermediaries’ legislation (known as IR35) is applicable to contractors who are working through an intermediary, rather than directly for the end client. The legislation was designed to identify those who HMRC consider “hidden employees” and ensure every contractor pays the right amount of tax and national insurance contributions (NIC). Starting in April 2017, the government has proposed that organisations/agencies in the public sector will be responsible for determining the IR35 status of their contractors’ Personal Service Companies (PSC). At the moment it is the responsibility of the PSC to determine their IR35 status and to pay the correct amount of tax and NICs.

IPSE, which represents freelancers, contractors and consultants has warned that the plan is dangerous and that “It will force contractors out of the public sector, create huge problems around employment rights and prevent the delivery of vital public services.”

What will the IR35 changes mean for agencies?

Moving forward, agencies could find themselves in a tough situation, where every new contract will need a thorough internal review. If the agency fails to determine the IR35 status for all contracts and the contractor fails to pay the correct amount of tax and NIC, the agency could face debt transfer and be at risk of heavy fines. Agencies will argue they are not qualified to carry out such legislative based administration. Therefore, it is probable many agencies will discourage contractors operating their own PSC, and instead try and persuade contractors’ to use a PAYE Umbrella company, eradicating the agencies legal responsibility.

How will contractors be affected?

At first glance, contractors’ may see this as good news because they are no longer responsible for defining their own IR35 status. However, if agencies are unwilling to support contractors working through a PSC, contractors who have a genuine B2B relationship could potentially lose out on a flexibility of running their own limited company.

Research carried out by IPSE, our affiliate, has revealed nearly a third of contractors will no longer consider working in the public sector if these changes go ahead. Further to this, 1 in 4 contractors would increase their day rate, creating an imbalance in the public sector supply chain.

How is the industry reacting?

IPSE are urging the government to reconsider. IPSE “argue that the proposal will damage not only the 26,000 Personal Service Companies in the UK but their public sector clients and agencies too”. IPSE also add that “no good will come out” of the changes. They have written a letter to the Chancellor outlining their concerns and will continue to stand up for and represent contractors working in the public sector.

When will more information on the proposed IR35 reform be available?

We will most likely have to wait until the Autumn Statement 2016 is released for further information. K&B Accountancy Group and Cloud9 Umbrella work closely with industry bodies and will update agencies and contractors as soon as more information is released. Please contact K&B Accountancy Group or Cloud9 Umbrella if you want to know more.

Please regularly check our blogs for more information. We will continue to post articles, as further updates are made available.