Despite HMRC's insistence, IR35 reform is affecting public sector contracting.

Words, hubbul

Changes to the off-payroll working rules introduced in April of this year are, contrary to reports from HMRC, affecting public sector contracting. Controversial IR35 reform shifted the responsibility for determining employment status from the contractor to the public sector client or agency. Needless to say, this was an unpopular move.

Making largely inexperienced public sector companies and agencies responsible for setting the IR35 status of thousands of contractors risked inaccurate IR35 decisions, and the very real prospect of a public sector exodus.

Understandably, contractors feared being wrongly placed inside IR35 by clients and agencies – a determination which would force them to pay the same tax as an employee, just without any employment benefits.

Leading industry voices expressed outrage over recent public sector reform, which has only intensified following mounting speculation that similar changes will be rolled out to the private sector before long.

And now, to dispute HMRC’s opinion that IR35 reform is working, APSCo have published research to suggest otherwise. 70% of recruiters have revealed that contract placements in the public sector have dropped off, suggesting that contractors are as expected less inclined to work in this sector.


Worryingly, the research also highlighted that IR35 reform has largely impacted the number of contractors working through their own personal service companies. In April 2016, over 50% of APSCo’s survey respondents stated that more than 75% of their public sector contractors were working through their own company. By August 2017, this figure had plummeted to 20% - proof in itself that IR35 reform is damaging the UK’s independent workforce and public sector staffing.

Many contractors have raised their day-rates as they face the very real prospect of being placed inside IR35 by their public sector client or agency. 45% of recruiters have witnessed a cost increase, 46% of whom reported rate rises in excess of 15%.

Reinforcing the long-held opinion that IR35 reform would damage public sector contracting, Samantha Hurley, Director of Operations at APSCo explained:

“As we feared, it seems that these changes have had an adverse effect on the supply of contractors to the public sector. The increase in rates which has been noted can be attributed to two factors: the scarcity of resource created by candidates moving into the private sector and the market adjusting by passing on additional tax and NI costs to the public sector client.”


In due course, HMRC is expected to roll reform out in the private sector. 78% of recruiters believe that extending reform will impact the UK economy’s ability to source flexible labour, while 48% of contractors surveyed by Qdos Contractor marked potential private sector reform as their number one business concern. That one in three contractors would consider going employed should IR35 reform reach the private sector speaks volumes. 

Unfortunately, many believe it is a case of not if, but when private sector reform arrives, as Samantha Hurley stated:

“We assume that HMRC is continuing to consider an extension of the Off Payroll rules into the private sector. Like our members, we believe that this will have an adverse impact on the strength of the UK’s labour market and wider economy.”

“The rise of professional contracting delivers multiple benefits to the UK economy through a highly productive and skilled labour force available on demand. Introducing the Off Payroll rules into the private sector without a full understanding of the market and the impact that an increase in costs will have on private sector productivity could have a devastating effect on UK competitiveness.”

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