Analysis comes amid reports that the contractors behind HMRC’s own tax status assessment tool are set to leave the public sector because of the clampdown

ContractorCalculator says 50% of assessments have ruled contractors inside IR35 – Photo credit: Pexels

The contracting website ContractorCalculator has said that half of the contractors it has assessed in the past two months fall “inside” the tax legislation known as IR35.

The UK’s tax authority is tightening up the legislation as part of reforms that aim to tackle contractors who are not paying the right amount of tax, which it estimates is costing the public purse £440m a year.

As the legislation currently stands personal service companies – which are often single people offering their personal services and are common in the IT sector – are responsible for applying the right PAYE and national insurance taxes on the payments they receive.

However, HMRC says that this is not always done correctly and, as of 6 April, it is shifting this responsibility to the bodies or agencies that hire the contractors.

The reforms are only being implemented for public sector contractors initially, but sources have told PublicTechnology that it is widely believed this is a “testbed” before the reform is rolled out to the private sector.

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The crackdown has brought with it claims of a “mass exodus” of public sector contractors, who have said they would prefer not to work for the government than pay the extra taxes, which could be up to 20% more a year – without, they argue, any extra benefits such as job security.

Although the rules apply across the public sector – there are an estimated 20,000 contractors on the government’s books – it is expected to hit the technology professions hardest because there is already more competition from the private sector in digital than in some of the other areas where contract workers are prevalent, such as healthcare.

“The big problem is the IT guys, because they can just jump ship,” Dave Chaplin, chief executive of the contractor portal ContractorCalculator told PublicTechnology earlier this month.  

“There will be some people that have been there for years and will clearly be caught by IR35…those people will probably leave the public sector.”

Chaplin’s site provides a free online calculator for contractors to assess if they fall within IR35, and its latest analysis – released yesterday (30 March) – said that of 5,000 reviews done in the past two months, 50% of contractors would be liable to pay taxes under IR35.

Of that group, the site said that the most common reason for failing was  because they are deemed to be providing personal service – this was the case for 58% of those who failed.

Some 39% are not working on specific projects, while 38% are required to work minimum hours and 29% said they could be asked to work on an alternative project.

These are both factors that “indicate a very strong ‘mutuality of obligation’ between the client and the contractor, an issue that crops up in many IR35 cases in court”, ContractorCalculator said.

The remaining 20% are told how to do their work, which the site said indicated a lack of autonomy that makes it “near on impossible” to be considered outside IR35.

Chaplin said that it wasn’t surprising that the results were so high, because many people using the tool were nurses and social workers.

However, he criticised the government for creating a situation where “chaos and confusion abounds as public sector hirers grapple with the new legislation and contractors and others in the supply chain are being thrown into turmoil due to the uncertainty being created by these reforms”.

HMRC’s IT contractors ‘expected to leave’

Meanwhile, The Register has reported that the IT contractors that built HMRC’s own assessment tool – the Employment Status Service – are among those who are leaving the department.

According to the technology site, the IT software consultancy behind the tool had 250 contractors working in the department and it quotes sources as saying that they are all likely to leave to escape the changes.

Earlier this month, Dave Rutt, head of IT project delivery at the Department for Education, told a conference that “the threat of contractors leaving government is putting even more pressure on our fairly meagre internal resources”.

The Home Office’s chief information officer Sarah Wilkinson also recently told ComputerWeekly that the reforms would have a significant delivery impact due to “a degradation of the contractor population”.

However, HMRC has declined to acknowledge this effect, with a spokesman saying previously that it “has not seen evidence of any movement to the private sector”.

The spokesman said that the aim of the reforms was to create balance between contractors and civil servants working in government.

“Public sector organisations and contractors are free to work with each other in a manner that suits their circumstances, however it’s fair that two people doing the same job should pay the same taxes. These reforms will help ensure that happens,” he said.

“Like all tax changes, we are monitoring their effect to make sure they work effectively and fairly and we have yet to see any cause for concern.”