Government Workers IR35 Changes: Is it as bad as it looks?

By 19. January 2017News

In the 2016 Budget, the former Chancellor George Osborne announced that public sector bodies will be responsible for establishing whether any government contractor should be treated – and taxed – as employees, or if they are actually self-employed.

If you’re a government contractor using a Limited Company, the impact on the way you work and perhaps more importantly, your earnings could be dramatic. This is a change that will affect you and it is important to seek independent, professional advice on how best to deal with this. ContractingWISE have been monitoring this situation closely so that we can advise you on all aspects of the situation.

Following the consultation period over the Summer the government finalised their plans and they were announced by the new Chancellor of the Exchequer, Phillip Hammond in the Autumn Statement. The new IR35 regime will mean that earnings from government contracts could be paid on a PAYE basis. The changes are being implemented despite the concerns raised not only by government departments but those raised by all industry stakeholders, IPSE said that they were “seriously concerned” while APSCo was “furious” with the new changes.

From April 2017, those government contractors engaged on a government contract using a Limited company will find the responsibility of determining whether their contract is inside or outside IR35 status transferred to the party paying the limited company. This could be the government department or the recruitment agency. Due to the penalties that could be incurred as a result of not identifying the IR35 status correctly it is feared that the government department or recruitment agency will automatically consider the contractor inside IR35 and subject their earnings to full PAYE.

This is bad news for contractors working on government contracts. There has been backlash from the wider contractor industry such as IT professionals, project managers etc. who are considering rejecting public sector contracts or demanding higher rates as compensation for the greater tax liabilities that they will face from these roles. We are expecting the public sector to have to spend much more money filling these roles or they may struggle to fill them at all. Many contractors are furious that having taken the step away from direct employment in the public sector, and the financial risks of working out of contract, that this new regime draws them back in to PAYE but without any of the financial benefits of an employed contract.

Following on from this, the government also announced the removal of the 5% tax-free allowance for business expenses for those working in the public sector, on the basis that “workers no longer bear the administrative burden of deciding whether the rules apply”. This means contractors working on public sector contracts will likely end up renegotiating contracts to make up the significant financial shortfall they face and having more complex accountancy issues than before.
Industry bodies have warned that the changes being implemented could result in placing the UK in danger of moving from being one of the most flexible to one of the most inflexible labour markets in the world and that it was a disaster for public sector talent supply. Economic forecasters predict that labour costs will rise at a time when the public purse is being scrutinised and budgets are already tight.

In addition to the new IR35 regime that will be implemented from April 2017, the Chancellor also announced changes to the Flat Rate VAT scheme. A new 16.5% rate will be introduced for “limited costs traders”. This description covers those businesses that do not have significant costs for goods and materials – so many contractors working through their personal service companies are likely to be affected.

We are urging any government contractor to seek independent, professional advice. ContractingWISE have been monitoring this situation since the whitepaper last Summer and have already provided options for government contractors who were anxious that this day would come. As independent advisers working with a range of contractor solution providers, ContractingWISE can offer contractors confused about their options, professional guidance and assistance. If you’re looking for more information about what contractors should expect in the new financial year, you can read our latest guide here.


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