IT contracting after IR35 reform
The reforms to IR35 were introduced in April 2017, by HMRC, to clamp down on an estimated 20,000 contractors who essentially work as permanent employees, but use their off-payroll status to avoid making PAYE and national insurance contributions.
The government shifted responsibility for compliance with the IR35 legislation from the individual contractor to the public body or recruitment agency – basically the end-client, not the contractor, was the party who would determine the ‘inside’ or ‘outside’ status of existing and new assignments in the public sector.
The reforms were intended to prevent contract workers paying less tax for doing a job that would otherwise be done by a permanent employee. Previously, it was up to contractors to self-declare if their public sector engagements meant they should be taxed in the same way as salaried workers (inside IR35) or as off-payroll staff (outside IR35).
Recruitment firms providing contract staff to government warned before the April reforms that the IR35 changes could harm public sector projects.
The IT contractor market, as an specific market had quite an impact since then.
According to a survey of contractors the vast majority of UK government IT projects are suffering delays due to freelancers quitting over the IR35 tax clampdown.
Approximately one third of limited company contractors just immediately quit. Of 405 IT freelancers surveyed by Contractor Calculator, 79 per cent said the projects they have been working on were delayed as a result of contractors leaving. Some government departments lost up to 40% of their IT contractors
However, the overall number of freelancers leaving as a result of the changes is lower than previously thought, with 48 per cent.
Half of the contractors who decided to stay managed to find a way of working outside the IR35 changes . 13 per cent working within the scope of IR35 but negotiating a rate increase. The other contractors mostly chose to switch to umbrella companies . However, over the last six months, nearly all of these contractors have simply quit, having secured roles in the private sector.
Many candidates applying for roles then withdraw either because they weren’t aware of the financial implications of an ‘inside’ IR35 role, or they hadn’t noticed the rate. An executive at one supplier said several digital projects in government had been put on hold or even scrapped because of IT contractors leaving after being told they were inside IR35.
There is much lower response to advertisements, as the rate offered is lower for jobs deemed ‘inside.’ The experience and qualifications of applicants is not as strong as before the reform, so the standard of IT skills supplied to the public sector has subsequently dropped since April. and taxpayer bodies are not getting the calibre of IT expertise they once were.
Contractors take ‘inside’ jobs as a stop gap but continue to look for an ‘outside’ role.
This affected public sector IT projects – a few projects have been completely abandoned. And nearly every public sector body has made more use of consultancies since April, especially for critical work. This typically costs two to three times more than a contingency contractor.
Lot of projects have just been delayed with delivery dates being pushed back.
The impact of this is not completely visible yet, but the end user – the general public – is being short-changed by late delivery by a wide cross-section of public sector bodies.
As for the impact on the contract market, there has been an increase in applications for private sector roles. This has not brought rates down because many of these roles are sector-specific, so public sector experience isn’t suitable.
The change has brought about abandonment and delays to public sector IT projects, along with a lower standard of work, which may have a profound and long-lasting effect.
Before considering applying reforms to the private sector we should wait to see outcome of April changes.