In HMRC, IR35

A new study by the Association of Independent Professionals and the Self Employed (IPSE) has found that if controversial new reforms to off-payroll intermediaries in the public sector should come into effect, then an exodus of contracting professionals will quickly ensue.

Over half (54 per cent) of contracting professionals working via the intermediary of an incorporated business known as a Personal Service Company (PSC) plan to leave the public sector if the Government plans to change how their proceeds are taxed.

HMRC is recommending that engagers (recruitment agencies or public sector end-clients) should be made responsible for determining the IR35 status of any professional contracting in the public sector through a PSC, a shift away from the current arrangement, which places this responsibility on the contractor’s company. The agency or end-client would thereby become obligated to apply employment taxes to all PSCs deemed to be “caught” by the new rules.

The rule change will result in large numbers of PSC contractors being taxed as employees without being granted any employment rights.

IPSE’s survey found that almost a third (31 per cent) of contractor respondents will no longer accept any public sector contracts if the new measures are implemented, and they will not even wait to find out whether they are obliged to pay the same income tax and NICs as employees.

Nearly a quarter (23 per cent) said that they would terminate their public sector contractors if they were required to pay tax like an employee. The overwhelming majority (81 per cent) of those planning to terminate their public sector contracts or cease accepting public sector contracts said that they would work outside the public sector instead.

Five per cent of those planning to leave the public sector if the plans are implemented said that they would retire earlier than planned. Thirty-nine per cent said that they would have no alternative but to increase their day rate to recoup additional tax liabilities if the plans are enacted.

IPSE CEO Chris Bryce said: “Public sector bodies, seeking to salvage and maintain large scale projects, would have to find alternative resources – or hire PSCs at an increased rate – leading to significant cost to the taxpayer. Even HMRC’s own published research has shown it to be a bad idea. And what of the future? So far this proposal applies to only public sector contracts – but for how long? If these rules were applied to the private sector the consequences would be beyond disastrous.”

In its formal response to HMRC’s consultation on the matter, IPSE has called for the proposals to be abandoned and has echoed the call of Umbrella Company trade body PRISM for a strategic review of the tax system.

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