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I can see trouble ahead….. as IT contractors face the IR35 music in the Public Sector

If you have not heard of IR35, in simple terms it is a tax law which limits some independent contractors who run their own limited companies from paying themselves in director’s dividends, hence avoiding PAYE taxes on their income.

Money money money!

Since its launch the late 90s this law has been hated by the contractor community as prior to its introduction the tax break was seen as an upside of being a contractor, launching their consulting business against the back drop of losing their FTE employee status and benefits such as pension, paid holiday, paid sick leave and job security.  It was seen as a balance of risk and reward.

Since its launch it has been the responsibility of the contractor themselves to decide “if the contract assignment they are working on is subject to the law or not?”  The decision making criteria are complex and in certain areas ambiguous / contentious and open to interpretation.

Many contractors rightly or wrongly assumed that clever wording in the “Assignment Contracts” would protect them from IR35 applying to them.  Some have stuck their heads in the sand in the hope they do not get a knock on the door from the armies of tax inspectors the government has allegedly brought out of retirement  to investigate contractors.  Others have tried to dodge the bullet by using aggressive tax avoidance tactics.  I heard of one contractor saddled with a bill for unpaid taxes, national insurance contributions and penalties totaling £141,000, following a four year battle with HMRC.

So the Government has decided to move the goal posts for those contractors working in the public sector and they have decreed that contractors will no longer be able to determine themselves, if they are inside or outside of IR35.

Inland Revenue

From April It is now the responsibility of the public sector employer to make the call and if the employer gets it wrong the employer will be liable for the unpaid tax and a fine if the contractor does not cough up.

But fear not, the Govn’t  are going to provide a digital tool to help the PS bodies decide if Mr Contractor is “In or Out”.

As contractors, agencies, clients, solicitors and HMRC have been arguing for nearly 20 years about what constitutes in or out of IR35 (given the above mentioned case lasted 4 YEARS) and the Govn’t think their tool is going to demystify the whole thing.  Correct answer, black and white in the click of a few buttons.

I suspect the tool will only have one answer, everyone is IN – Pay up Mr Contractor!

Bearing in mind this new tool has not been released yet, it is now Jan 24th and the new rules apply in less than 9 weeks, plenty of time for testing then.

With or without a tool I suspect many bodies will want to mitigate their risk of future claims by calling everyone IN anyway.

I have had conversations with a number of high ranking Public Sector IT leaders rightly worried about the impact of these changes.  They are expecting contractors to take two courses of action;  the first predictably is asking for a rate rise to cover their increased tax burden or secondly voting with their feet and heading off to work in the private sector (where these new rules do not apply (YET)), leaving unfilled jobs that need doing. Both will have an impact on the delivery of programmes that have relied on the interim and contract workers to date.

With commentators predicting delays to projects and increases in costs being inevitable, the public purse will picking up the pieces. Only time will tell if the increases in tax revenues for HMRC will be equal or less than the money it’s going to cost some PS organisations as the impact plays out.

In the medium term I hope we can be creative, I think there is a massive opportunity here. Public Sector IT Leaders, Entrepreneurial Contractors and nimble Agencies – Let’s get our heads together.  Hypothetically whats stopping “Greenfield Consulting” tendering for work packages with the help of Savvy Contractors via G-Cloud Digital Marketplace, I guarantee we would come in cheaper than Serco, Capita or IBM. If successful, Greenfield engage the contractor (s) on a price for the job / equivalent day rate to maximise the reward with some calculated risk – we will still be delivering programmes, for the same people just a shift in the pricing structure and way we deliver our services.

One thing for certain the lyrics of the famous song ring true – but we will have to leave the dancing to Fred Astaire.

Before the fiddlers have fled
Before they ask us to pay the bill and while we still have the chance
Let’s face the music and dance.

Soon, we’ll be without the moon,
Humming a different tune, and then,
There may be teardrops to shed,
So while there’s moonlight and music,
And love and romance,
Let’s face the music and dance

Fred Astaire

End.

 

Steve Moran