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Public sector contractor placements have dropped following IR35 reform

6 Oct 2017 By Emily Burt

Experts warn extending changes to private sector would be ‘hugely damaging’

Public sector organisations have been battling a significant talent drain since the IR35 reform in April, with 70 per cent of recruiters reporting that the number of public sector contractor placements has fallen, new research has warned.

In the survey of 1,494 recruiters by the Association of Professional Staffing Companies (APSCo), 45 per cent of recruiters had also seen evidence of contractors increasing their rates since the rule change. Of these, 46 per cent said rates had increased by more than 15 per cent.  

“As we feared, it seems that these changes have had an adverse effect on the supply of contractors to the public sector,” said Samantha Hurley, director of operations at APSCo. “The increase in rates that 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 national insurance costs to the public sector client.”

Since April 2017, public sector employers have been responsible for deciding the employment status for tax purposes of the contractors they take on. Those deemed to be ‘inside’ IR35 are taxed in the same way as employees, even though such people may not be eligible for typical employment rights, such as holiday and sick pay.

However, the changes were barely in force when warnings started circulating that they would seriously damage the talent pool available to the public sector. Research by Qdos Contractor, published in April, warned that 85 per cent contractors would stop working in the public sector if they were deemed to fall within IR35.

Julia Kermode, chief executive of The Freelancer & Contractor Services Association, said the APSCo research confirmed these fears and highlighted the negative effect the reform had had on the public sector. “We have seen sweeping decisions being taken by some public sector bodies banning all workers who operate through their own limited company [known as a personal service company],” she said. “This has seen many contractors deciding to leave the public sector, or seeking an increase in their rates, which is exacerbating skills shortages and financial pressure in an already stretched public sector.”

APSCo’s research also found that 78 per cent of recruiters believe extending IR35 to the private sector would hinder the wider economy’s ability to source flexible labour. Dave Chaplin, chief executive and founder of online contracting site ContractorCalculator, said there was now “overwhelming evidence that any further roll out to the private sector would be hugely damaging to the UK overall”.

A study by Qdos Contractor, published in August, found that the possibility of the IR35 reforms being extended into the private sector topped the list of contractors’ worries and was a bigger concern for them than issues such as competing for work, lack of support for self-employed workers and Brexit.

However, in an earlier blog post for People Management, Jim Harra, tax assurance commissioner and director general for customer strategy and tax design at HMRC, said it was simply not true that public sector bodies were classifying all contractors as inside IR35 as a blanket rule, and that HMRC had seen no evidence of a mass exodus of contractors.

“Contractors come and go, and the market is naturally fluid, but it would be wrong to suggest that the public sector has significant recruitment gaps because of this reform,” Harra wrote.

People Management has contacted HMRC for comment on the APSCo findings.

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