Treasury sticks to plan to ban off-payroll contractors across entire public sector
An approaching ban on the employment of “off-payroll” contractors in the public sector has prompted warnings that it could be a deterrent to IT specialists working on public sector projects.
HM Treasury made clear last week in papers published with the draft Finance Bill that the Government will legislate “to reform the off-payroll rules (often known as IR35) in the public sector”, with the measure to take effect on 6 April across the UK.
Under the new plan, the relevant public sector body will take over from a contractor’s personal service company responsibility for assessing employment status and deducting any tax or national insurance contributions due. This should provide a significant boost to HM Revenue & Customs' cash flow, as a much larger share of the money spent on contractors will be taxed at the income tax rather than the corporation tax tate.
Meanwhile the 5% tax-free allowance for “general business expenses” will be withdrawn for personal service companies working in the public sector. “This will simplify administration and reflects the fact that PSCs no longer have responsibility for applying the rules,” the Treasury said.
The changes will apply to all bodies in the public sector, which for the purposes of the legislation are defined as “those subject to the provisions of the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2002”.
Responses to a consultation on the proposed changes included warnings from contractors and their representative bodies that they would decline to work for the public sector under the new regime.
IPSE, the Association of Independent Professionals and the Self Employed, said it had commissioned research showing that 54% of contractors will leave the public sector if changes to the IR35 small business tax come into place, and 39% will demand an increase in their rates if they stay.
A summary of responses published by the Treasury said: “Many contractors and their representatives said they would choose not to work for the public sector as a result of the reform.
"Some contractors said they would have to consider whether their rates would need to change to take account of the increased tax and NICs that would become due. They said that if rates rise this could lead to skills shortages in key sectors such as IT and engineering and increase public sector hiring costs.”
In response, the Government said it is not seeking to increase the numbers of people who should be subject to off-payroll legislation.
“The changes are intended to improve compliance with the current rules where they are not being operated correctly," Treasury said. "Where an individual would have been taxed as an employee had they been engaged directly, rather than through an intermediary, it is right that they should pay broadly the same tax as an employee. Individuals doing the same job should be treated similarly.”
It added that “people who are genuinely self-employed… will not be impacted by this change”.