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New IR35 rules will cause real headaches for public sector employers and PSCs

Fri, 10 Feb 2017 | Colin Cottell
ARC conference
Panellists at the ARC conference

New IR35 rules expected to become law in April will cause “real problems” for employers across the public sector as a result of personal service company (PSC) contractors seeing big reductions in their take-home pay, recruiters have heard.

The new rules contained in draft legislation mean that where a recruitment agency is the ‘fee payer’ (ie. where it pays the PSC), it will be responsible for paying the tax and employer’s National Insurance contributions of 13.8% of PSC contractors it supplies into the public sector, where the PSC contractor falls within IR35 (ie. is not genuinely self-employed).

“They will be deemed to be the worker’s employer for tax and NICs purposes,” Adrian Marlowe, chairman of ARC (the Association of Recruitment Consultancies) told an audience of recruiters at a conference in London yesterday.

Under current rules the tax advantages of being self-employed mean that PSC contractors working in the public sector can be significantly better off than employed workers, even when they are both doing exactly the same job in the same organisation.

Colin Morley, professional services director at professional recruiter Harvey Nash, a panellist at the event, predicted that contractors would move out of the public sector, citing the Ministry of Defence and the NHS as likely examples. IT departments across the public sector who are heavily reliant on self-employed contractors would be particularly badly hit, he said.

A medical recruiter, who attended the conference but wished to remain anonymous, said nurses in the NHS, many of whom are engaged through their own PSCs, would be badly affected.

Speaking at the conference, Theresa Mimnagh, associate director at legal consultancy Lawspeed, said she expected some PSC contractors currently working in the public sector would switch to the private sector, where the new rules will not apply.

Morley said that some public sector bodies were already taking away the PSC contractor option for workers. “The Bank of England had said that contractors will have to be paid net [of tax and NICs],” he said. Mike Innes, regional director at engineering recruiter TRS Staffing, and a fellow panel member, said Transport for London was already insisting that all workers were put on the payroll.

Morley said it was the company’s 500 existing PSC contractors working in the public sector, who would see a reduction in their take-home pay “who we are worried about”.

Kieran Rossiter, chief finance officer at professional recruiter Morgan McKinley, and also a panel member, said in anticipation of the new rules he was already seeing PSC contractors switching to working through umbrella companies.

The government is bringing in the changes to IR35 as part of its anti-tax avoidance stance, having identified the public sector as an area where abuse was taking place, with organisations such as the BBC engaging PSC contractors, in some cases for years at a time.

The government says it expects the exchequer to bring in an extra £450m a year as a result of the changes. The government has refused to say whether it intends to introduce the new rules into the private sector.

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The government is already crippling contractor workers by invoking a change to the tax legislation and applying it retrospectively. The result is thousands of contract workers receiving enormous tax bills with just 3 months to pay in some instances a six-figure sum with fines being levied every three months where full payment hasn't been made. This has, and continues to destroy lives in many ways, there are known suicides and many bankruptcies.
I understand it is only certain 'Umbrella' schemes that are being targeted with those schemes being used by MPs and other government and senior business officials being excluded.
The income was declared in tax returns as loans and in addition to these being taxed on PAYE basis, there is a real threat that HMRC will demand full repayment of the loans in 2019. Yes this money was/is viewed as tax avoidance but it will result in earnings for a given tax year being a negative figure (and they can claim back 7 years) – can you imagine this length of time with NOTHING coming in at all??.

Lee Vern (10/02/2017 15:51:03)

The government keeps hitting contractors: From personal experience contractors rarely move from one contract immediately and in the interim period they have zero income. They have to apply for each and every job they get (or don't get), spend an extreme amount of time seeking new opportunities every six months or so. For this they receive no company pension benefits, sickness pay, holiday pay, job security, no training, bonuses, no home working etc. Contractors inherently work much longer hours than permanent staff, commute / travel further, are far more flexible in their remit and, they only get paid for the actual days they work. They also have the vast administration burden of managing their accounts, expenses, collecting and paying taxes (VAT and corporation) and recording everything in case of audit etc etc. Until this fiscal year, contractors (self employed workers) had one benefit which allowed them to draw IRO £30k pa from their business as a tax free dividend, the government took the decision to tax this giving contractors yet another reason to go permanent.
These issues will ultimately force contractors into the permanent workforce and it is the Public Sector who will suffer the most in the long-term with a depleted 'casual' but workforce.
In summary, the risks for contractors are great when the benefits (if they can be identified) are sadly not now realistic.

Lee Vern (10/02/2017 16:06:24)