What's really happened to IT contracting since IR35 changed

It’s now half a year since the government brought in a major change to IR35 in that the end-client, not the contractor, was the party who would determine the ‘inside’ or ‘outside’ status of existing and new assignments in the public sector.

It’s even longer since I made some forecasts about what the reform would lead to, and how it would affect the IT contractor market, writes the REC’s Technology Executive Committee vice-chair Les Berridge, of IT contractor jobs specialists Networkers. 

Well, before the ground potentially shifts underfoot again at Wednesday’s Autumn Budget 2017, where an extension of the major change to the private sector is feared, let’s assess where we are right now. Have the changes increased HMRC’s tax take? How are they are affecting public sector projects? And what about the reaction from those directly affected; contractors?

Before I get going, please note that my analysis is confined to the IT contractor market. However, it would not be surprising if the same impact had been felt in other sectors, and indeed, anecdotal evidence indicates this to be the case.

Walking out (and other responses)

Let’s start back when the reform was introduced -- April. Well, based on what we’ve seen in the market and from talking to other agencies and contractors, we estimate that approximately one third of limited company contractors just immediately quit. In many cases, they walked out even if they didn’t have another role to go to! That showed the strength of feeling.

Meanwhile, around a fifth of assignments were called ‘outside’ -- these were largely key personnel on important projects and of course, they were happy to stay. The other contractors mostly chose to switch to umbrella companies, with just a few opting to go ‘deemed.’ However, over the last six months, nearly all of these contractors have simply quit, having secured roles in the private sector. That proves the strength of feeling.

Also since April, as much as 80% of new roles have been called ‘inside’ IR35, very often on a ‘blanket’ call basis. The very basis that the ‘reasonable care’ clause in the updated April legislation is meant to prohibit. Is HMRC even enforcing that?

It has been possible, though, to push back and get an ‘outside’ decision on a few roles. This high level of ‘caught’ assignments is in line with the stated HMRC view that 90% of assignments should be inside, supported by the Treasury (David Gauke, the-then chief secretary to the Treasury, sent a letter to all public sector employers saying that non-compliance with IR35 rules was widespread).

Four fundamental problems

Perhaps unsurprisingly, there has been no evidence of higher rates being offered to compensate for the extra tax being paid. The net result is four-fold; and none of it is particularly good for anyone.

Firstly, we get many candidates applying for roles then withdrawing either because they weren’t aware of the financial implications of an ‘inside’ IR35 role, or they hadn’t noticed the rate. This means, in practice, we have to shortlist again.

Secondly, we inevitably get a much lower response to advertisements, as the rate offered is lower for jobs deemed ‘inside.’ Thirdly, the experience and qualifications of applicants is not as strong as before the reform, so the standard of IT skills supplied to the public sector has subsequently dropped since April. That’s a consequence of the reform I’ve not heard talked about much (not by HMRC whatsoever), but it’s significant that taxpayer bodies are not getting the calibre of IT expertise they once were.

Finally, there is a much higher attrition rate as contractors take ‘inside’ jobs as a stop gap but continue to look for an ‘outside’ role. 

Expense, delays and deniability

How has this affected public sector IT projects? Well, despite what officialdom would have you believe, a few projects have been completely abandoned. And nearly every public sector body has made more use of consultancies since April, especially for critical work. This typically costs two to three times more than a contingency contractor.

In the main, however, projects have just been delayed with delivery dates being pushed back. It’s too soon to assess the impact of this more deeply, but it is fair to say that the end user -- the general public -- is being short-changed by late delivery by a wide cross-section of public sector bodies.

As for the impact on the contract market, there has been a noticeable increase in applications for private sector roles, especially Project Management, Business Analysis and Service Management. This has not brought rates down because many of these roles are sector-specific, so public sector experience isn’t suitable.

So overall, it is true that more people are working ‘inside’ IR35 in the public sector than before, but it’s still too soon to say if this has produced much extra revenue for the Exchequer. It is though, undeniable that the change has brought about abandonment and delays to public sector IT projects, along with a lower standard of work, which may have a profound and long-lasting effect.

Banking on the chancellor’s prudence

At the very least, chancellor Philip Hammond should await the outcome of the April changes, at a deeper level, before considering applying them to the private sector -- if at all. In the commercial sphere, delays are far more critical because of increased competition; a much higher incidence of late delivery penalty clauses and the impact of being late on profitability.  So these new rules’ half-year assessment from my point of view, as a senior recruiter, is in -- and it doesn’t look very good. Let’s hope reports of Mr Hammond being a cautious type are correct and he makes sure that the public sector gets a grip on the changes, more firmly, before he imposes them more widely, if he has to at all.

Editor’s Note: The views expressed in this article are those of the author, Les Berridge, and they do not necessarily reflect the views of Networkers or the REC.