IR35 tax reform causes mass exodus of public sector contractors

April’s IR35 tax reform is causing a mass exodus of public sector contractor talent and delays to projects agencies are recruiting for, according to research from contracting site ContractorCalculator.

The findings of their survey of 1,500 contractors, released this morning, reveals 76% of public sector departments have lost top talent due to the reforms, with the talent drain causing 71% of projects to be delayed or cancelled. 

The research, which follows on from anecdotal evidence that contractors had been leaving the public sector in droves in the month after the introduction of the new rules, also shows:

  • 27% of public sector contractors surveyed have left the public sector
  • 47% of public sector projects lost at least a quarter of their contractors
  • 61% of contractors left due to their refusal to work under new IR35 rules
  • 52% of contractors of those leaving the public sector are yet to be replaced
  • 50% of contractors say they will now never work in the public sector if caught by IR35 and 46% will only do so if the government effectively pays the extra tax.

With regards to public sector IT projects and the NHS in particular, the research found:

  • 79% claim IT projects they have been working on suffered delays as departments couldn’t draft in replacements, with 37% of IT contractors abandoning public sector in the wake of the reforms.
  • 25% of NHS departments have lost 50% or more of their flexible workforce
  • 63% of NHS contractors are thinking about a new career entirely, with 40% indicating they may quit contracting altogether.

And public sector recruiters are witnessing this outgoing talent affecting projects they are recruiting for.

Matt Gascoigne, chief operating officer at GatenbySanderson, told Recruiter project decisions are being delayed due the changes in IR35 rules.

“This has limited the flow of flexible talent in the market. While robust commercial conversations do need to be undertaken, this has often resulted in a failure to appoint or to appoint at an elevated price point in comparison to 2016 levels. 

“In some cases, vastly experienced interims have chosen to exit the public sector either in favour of opportunities within the private sector or simply to retire. At a time of rapid economic and political change with communities looking for reassurance, not disarray, then the public sector needs the very best flexible talent at hand. Our role has been increasingly to navigate these complex negotiations and continue to engage highly experienced interims who are vital to the future of our public sector and its infrastructure.”

David Leyshon, chairman at technical recruiter CBSbutler, adds: “Whilst we at CBSbutler have been proactive in addressing the IR35 reforms and evaluating solutions, there is clear evidence that contractors have left the public sector and, in particular, the NHS in droves.

“In many cases, we’ve seen a transition of contractors to other companies in the supply chain, but it is incumbent on the government to evaluate the real damaging impact this legislation will have on business before it’s too late.”

But in a statement an HMRC spokesperson claimed ContractorCalculator's findings were based on an “unrepresentative” sample.

“There is no evidence of a drift from the public sector and there have been no delays to IT projects due to the new rules. There is no change to contractor pay other than to make sure the correct tax is paid,” the spokesperson added.

The IR35 rules, introduced in April of this year, make public sector end clients responsible for determining whether a worker who operates through a personal service company or other intermediary is caught by IR35 or is genuinely self-employed. Where the worker is caught by IR35, the new rules would also makes the fee payer, who will often be a recruitment agency, responsible for deducting and then paying the worker’s tax, National Insurance and employer’s NI.

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