IR35 has led to ‘damaging unintended consequences’ for public sector employers

Report from IPSE and CIPD reveals more than half of managers lost contractors after tax rule change

Public sector organisations have been struggling to attract and keep hold of talented contractors following last year’s tax rule changes for the self-employed, a report out today has warned. 

The study by the CIPD and IPSE, the association for independent professionals and the self-employed, found more than half (51 per cent) of public sector hiring managers thought they had lost skilled contractors because of April 2017’s changes to the IR35 rules, while nearly three-quarters (71 per cent) were facing challenges in retaining their contractors. 

IR35 was introduced in 2000 to make sure workers who supplied their services through an intermediary – usually a personal service company – but would have otherwise been treated as an employee paid the same tax and national insurance contributions as employees.

Under the old system, contractors were responsible for deciding whether they were employed or self-employed. However, since April 2017, public sector organisations taking on a contractor have been required to determine their tax status and, if they decide they should be an employee, deduct tax and national insurance at source. 

Charles Cotton, senior performance and reward adviser at the CIPD, said the research suggested the IR35 amendments had resulted in “damaging unintended consequences” for the public sector. 

“HR professionals have said they are finding it harder to recruit and retain skilled contractors, which is contributing to project cost rises, projects being delayed and, in some cases, projects even being cancelled,” Cotton said. 

Chris Bryce, IPSE’s chief executive, said the findings were a “resounding retort” to what he called HM Revenue and Customs’ (HMRC) “deeply flawed” research on the tax changes’ impact on the public sector.

“[Our findings] confirm what we have been hearing anecdotally for a long time – these changes just have not worked,” Bryce continued. “In fact, they’ve caused serious damage right across the public sector, stalling major [Transport for London] projects and even contributing to the NHS staffing crisis.”

Bryce added it would be “nothing short of a disaster” if the government went ahead with its proposals to extend IR35 changes to the private sector. Chancellor Philip Hammond revealed he was thinking about rolling out the changes to the private sector in last year’s Autumn Budget and the consultation into the issue was launched last month. The consultation runs until 10 August. 

The CIPD and IPSE study, which surveyed 867 contractors and 115 managers, also found the changes might have increased the administrative burden across the public sector. Four out of five (80 per cent) hiring managers said they had seen a rise in workload involved in engaging and paying contractors. 

But an HMRC spokesperson told People Management the survey results were “not consistent” with the government’s understanding of the impact of IR35 reform. A study carried out by IFF Research on behalf of the taxman, published last month, concluded the amendments had led to “minimal impact on how public bodies recruit”.

Meanwhile, a report released earlier this week by the Recruitment and Employment Confederation (REC) discovered half (50 per cent) of UK employers were now struggling to find permanent hires – up 8 percentage points compared with this time last year. 

The research also showed two-thirds (66 per cent) of employers who recruited temporary workers were concerned about candidate availability too. 

Tom Hadley, director of policy at REC, said a lack of suitable candidates is “one of the biggest challenges facing the UK jobs market”. 

“With skills need and candidate expectations continuing to evolve, employers are having to innovate to attract the right people, particularly when competition between businesses for candidates is intensifying,” he said. “The government can help by ensuring the future UK workplace has the skills needed and put in place to a balanced and evidence-based immigration system post-Brexit.”