I love the law of unintended consequences.

New-look British public sector under revised IR35

On the other hand I don’t love big, stupid government.  You see, UK government is hoping to shake down independent contractors who operate through an intermediary (normally a limited company) to provide a service to a client because tax avoidance is bad boys and girls despite ample evidence that it’s not going to work.   They’re doing this is through revisions to the already-existent IR35 rules which were originally brought in by then-chancellor Gordon Brown in 2000.  The theory behind IR35 was that the Treasury was losing lots and lots of revenue because independent contractors, some of them doing similar jobs to regular employees, would pay themselves a minimal salary so as to avoid higher rates of income tax and National Insurance Contributions (NIC), and take most of their profits through dividends which attract a lower rate of tax.   Never mind that contractors normally work on short to medium term contracts, can be dismissed at will, and are not entitled to holiday pay, sick pay, or any other perks of employment, they’re clearly bad people because they pay less tax.  Of course, the difficulty of physically reviewing every contract for services to see whether it fell under IR35 rules meant that the provision  brought in little additional tax revenue and may not have even covered enforcement costs.

The current government has now hit upon what it considers the brilliant idea of switching the responsibility to ensure that a contract does not fall foul of IR35 from the independent contractor (or their service company) to the body that has contracted with them.  The new rules will come into effect in the coming tax year and will only apply to public service contracts.  Of course,  the public service bodies that employ independent contractors don’t want to be hit with fines for wrongly assessing contracts so they are now hurriedly getting rid of the option to work through a limited company, instead requiring contractors to work as if they are employed (but without employees’ benefits).

And predictably, independent contractors don’t want to work for public sector bodies

Public sector contractors in the UK are starting to down tools across a range of projects ahead of the new tax regime in April, leaving numerous projects hanging in the balance.

Multiple sources have been in touch with The Register to report that professionals are leaving in droves rather than face the IR35 tax changes. From April the responsibility for compliance with the intermediaries legislation will be the responsibility of the public body or recruitment agency…

One source reported that half of 87 contractors working on a defence-related IT project have already left.

Another reported that out of his team of security consultants, two-thirds have already moved to the private sector. “When you think that many of us have decades of experience, that amounts to a huge loss of organisational knowledge.”

According to site, ContractorUK, 30 PSC contractors will abandon an overrun £16.5m health service IT project after a NHS trust said it would declare them all inside IR35 from April 6…

Last year the Ministry of Defence lost 30 out of 32 contractors, who had baulked at the MoD’s approach to enforcing IR35 guidelines…

A survey by the site found that 90 per cent of UK government IT contractors will rebel against proposals by HMRC to clamp down on self-employed workers not paying the correct employment taxes…

It’s not just IT workers either.  The National Health Service employs large numbers of locum Doctors, Nurses, Pharmacists and other specialist health workers.   They’re already suffering from a cap on their earnings, so they’re not even in a position to put up their rates to make up some of the income they will lose to HMRC.  While there’s no report of an exodus of Locum healthcare professionals from the NHS just yet, I won’t be surprised if we begin hearing reports of shortages after the changes come into effect in April.

The situation must be looking pretty bleak for various public service bodies.  Already some of them are calling for the rules changes to be postponed.

They say madness is doing the same thing over and over again and expecting a different result.  There was no tax windfall when IR35 was originally introduced, and there’s unlikely to be any this time as independent contractors simply abandon public sector work in favour of taking contracts in the private sector which is still exempt from the new rules (don’t worry, the Government will be going after them next).   In the mean time, government bodies are going have difficulty hiring temporary workers and are likely going to see their costs of doing so explode.

A big win-win all around (NOT!!!!!).



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