This issue has been triggered by the government’s change to the IR35 tax regulation. Instead of agency workers organising their own tax affairs with HMRC, any IT contractor working in the public sector will have tax deducted from their salary by their employer. In terms of what’s in your wallet it could feel like a 30% pay cut in some cases. And you won’t be entitled to the same employed workers’ rights and benefits.
The rule change is based on an assumption that only 10% of agency workers are paying the correct amount of income tax and National Insurance Contributions. HMRC are seeking to recoup the shortfall and are starting with the public sector. This change does not apply to the same jobs in the private sector.
What’s the problem?
Think about all the different ways that we interact with public bodies and government departments using IT. It is reported by The Register that there are 18,000 technology contractors employed by central government alone, to develop and maintain all their various, crucial systems. We should all be concerned by the increasing number of reports of technology experts leaving public sector jobs ‘en masse’.
What are the risks?
Predictably, IT contractors have already started to pull out of government contracts. Anecdotal evidence in The Register points to:
- Ministry of Defence losing 30 of 32 IT contracts, directly due to the IR35 rule change. On one defence IT project, half of the 87 technology contractors have already left – and the rule isn’t coming into force until April this year.
- One NHS Trust has said that all of its IT contractors will be ‘in IR35’, leading to 30 PSC contractors deciding to leave the £16m IT project for the Health Service (that is already overran).
- One Security Consultant team has already watched 60% of their workers move from public into private sector work, saying: “When you think that many of us have decades of experience, that amounts to a huge loss of organisational knowledge.”
- Any NHS Trusts that are still migrating over from Windows XP could feel the effects of the dearth of IT contractors.
- The National Audit Office reports that there are currently 30% of all government IT projects are highly likely to fail in the next 5 years.
Another alarming prospect for public sector IT agency workers is that of HMRC claiming backdated taxes. This point was raised by the Chief Executive of ‘Contractor Calculator’ in describing how the tax change was promoting an atmoshphere of “fear and uncertainty”. Raising prices can only go so far if HMRC decide to backtrack.
IR35 and moving forward
Despite a commitment to working with SMEs, technology giants are the only ones poised to step in and bridge the gap as the public sector continues to lose its tech experts. It would be wise to assume that this will come at a fairly hefty price – so will this drive to supposedly recover unpaid tax end up being a painful false economy? Let’s hope not.
Tony Shanks