Computer Weekly has found that some Government departments have lost as many as 40 per cent of their contracting IT professionals as a direct result of their handling of changed IR35 tax rules introduced in April.
Around 20,000 contracting professionals working in public sector bodies (PSBs) were targeted by HMRC when it devised the new rules. Revenue officials maintained that many limited company contractors working in PSBs were using their off-payroll status to avoid making income tax and NICs.
Both the premises and the expected effects of the reformed legislation came under heavy fire during the consultation phase from a range of professional bodies representing contractors and the staffing industry. Those condemning the plan to transfer responsibility for determining an independent professional’s self-employed status from the individual contractor to the public sector end client were numerous.
Bodies criticising the proposals as unfair and unworkable included Umbrella Company trade associations PRISM and the Freelancer and Contractor Services Association (FCSA) as well as staffing industry bodies the Recruitment and Employment Confederation (REC), the Association of Recruitment Consultancies (ARC) and the Association of Professional Staffing Companies (APSCo). None of their criticisms were heeded, however, and the Government proceeded with the implementation of the reformed IR35 rules in April.
It is now clear that different Government departments took different approaches to introducing the new tax system. Some, including NHS Improvement, adopted a blanket approach and designated all contractors as inside IR35, although sometimes they included only those who were above an equivalent civil service pay grade. Others attempted a more case-by-case approach, as NHS Improvement has recently done, reversing its earlier decision.
According to Computer Weekly sources, departments adopting a more cautious approach have lost fewer IT contractors, including one large ministry, which lost just two of its contracting techies.
Absurd inconsistencies have now emerged. Four contractors working in a team in one Whitehall department were told that they would be caught by IR35 and taxed as salaried employees. They promptly switched to work on a similar project in a different Government department, where they were classified as outside IR35.
A number of Government digital projects have been scrapped because of IT contractors leaving, according to an executive supplier who spoke to Computer Weekly. Other department have hiked pay for contractors by as much as 20 per cent to compensate for the extra tax that they have to pay in order to retain these workers.
Last October, 30 out of 32 IT contractors left the UK Hydrographic Office after learning that they would be placed within IR35.
At a time when the Government’s digital workload is expanding rapidly, the IR35-driven loss of skilled contracting professionals bodes ill for the public sector.