IR35 tax changes ‘already having huge impact on public sector’

10 Apr 2017 By Marianne Calnan

Recruiters tell of ‘real mess’ as contractors shun work or demand 20 per cent pay hikes

The public sector is already facing a struggle to attract temporary staff, according to recruiters, as contractors turn their backs on work or demand sizeable pay increases in the wake of controversial changes to IR35 legislation.

The new rules came into force on 6 April, but there are significant reports of IT contractors in particular choosing to boycott the public sector. Nurses, engineers and social workers may also be affected, according to a report in the Financial Times this weekend.

Under the reforms, public sector employers have to deduct tax and national insurance contributions from contractors’ pay at source, rather than allowing them to defer and claim expenses. It has been suggested that those working regularly in the public sector could lose 30 per cent of their take-home pay, while last week research from a firm of tax specialists revealed that four-fifths of contractors said they would leave the sector if they were affected.

Andrew James, managing director of Michael Page Facilities Management, Property and Construction, told People Management that many contractors were demanding to be paid 20 per cent more than their previous day rate to compensate for IR35.

“For some organisations, this price hike has been too much,” said James. “Indeed, we have also seen niche skillsets moving out of the public and into the private sector, a trend that will undoubtedly increase as time goes by. In line with this, many public sector organisations don’t have the budget to recruit permanently and they’ve been left in a ‘catch 22’ situation without anyone filling the role.”

Most organisations in the sector were being extremely cautious in their approach, he added – while some were operating on a case-by-case basis, others had issued a ban on employing anyone who used a personal service company. There have been separate reports that even contractors who have a clear case to be classified as genuine self-employed freelance workers are being forced onto payroll.

Meanwhile, Colin Morley, director of recruitment firm Harvey Nash, told the FT that one in three candidates were now turning down jobs in the public sector. “It’s been a real mess… we are not able to meet the demand coming through,” he said.

The reforms, which were announced in the 2016 budget, are expected to see the Treasury raise an estimated £185m during the current tax year. Treasury officials said they were monitoring the effect of the changes on Whitehall departments, and had yet to see any cause for concern in terms of recruitment.

The issues created by the reforms are reported to be particularly acute in hospital A&E departments, which account for almost a fifth of the budget for locum doctors. Chris Hopson, chief executive of NHS Providers, which represents hospitals, said a number of his members had reported that “some contractors are seeking to put pressure on them to pay more or interpret the rules more generously than they should be”.

Others remain optimistic. Public sector recruiter Badenoch & Clark has been hosting seminars to bring its clients and contractors up to speed with the legislative changes. Operations director Katy Crothall said: “While the content is a challenge for us all, it was great to be able to have an open and honest discussion about the solutions and how we can work together.”

Michael Page also reported that there remained an “appetite” to recruit temporary staff, including managers, but said the “complexity” of the issue had caused issues for HR departments.

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