Public sector ‘struggling’ to pay IR35-caught contractors more

More than four in ten public sector contractors have managed to raise their daily rates to stop IR35 reforms from being too taxing, an agency poll shows.

In fact, 12 months since the reforms hit, 42% of contractors have had to mitigate the cost of being found inside IR35 by hiking their pay, says Harvey Nash Recruitment Solutions which polled 500 contractors.

That represents an improvement on May 2017 (one month after the reforms were introduced), when just 16% of contractors had managed to get more money to cushion the tax blow.

Since April 2017, if contractors are decided by their end-client to fall within IR35, payments made to them via their agency cannot be gross and must include tax and NIC deductions.

But despite securing extra cash to take account of the “significant drop in earnings” that the tax change imposes, Harvey Nash suggested that contractors were anything but content.

When asked about IR35 and its impact on their livelihood, 90% of contractors told the recruitment agency that they felt “stressed, worried or angry.”

“IR35 has created an uncertainty that hinders a contractor's business by impeding on its financial strategy,” the agency said.

“The levels of frustration, fuelled by the rudderless and sometimes contradictory IR35 forum meetings, have resulted in mistrust”.

In an attempt to further pinpoint the source of ill-feeling, the contractors were quizzed more deeply, on issues ranging from the availability of contracts to the role of HMRC.

Half said contracts were now harder to come by as a direct result of the updated legislation; and almost as many now only seek contracts in the private sector.

And despite the 42% who pocketed a rate rise to cushion the tax blow, 43% said their tax bill had shot up. As to any help from HMRC, only 8% said it was a reliable source.

“The implementation of IR35 to the public sector continues to cause enormous disruption and, in some cases, real financial misery”, says IR35 expert Kate Cottrell of status advisory Bauer & Cottrell.

Suggesting a ‘dry-run,’ she added: “The public sector has been the guinea pig in this, and it is time to call a halt to this experiment before considering a roll-out to the private sector.”

There was also an indication that, despite the jump in the stock of contractors who have secured rate rises to ease the impact of the tax reforms, further financial cushions aren’t guaranteed.

“The issue here is that public sector authorities are already struggling to budget for such a rise in cost across the board,” warns Harvey Nash Recruitment Solutions director Colin Morley.

He pointed out that impact assessments have not been conducted within the public sector to investigate the effectiveness of the new IR35 legislation, seeming to beg the question:

“Has it returned the circa £400million to the Treasury that it promised to do so?

“Without concrete data,” Morley added, “it seems irresponsible to roll out the same set of rules into the private sector when the consequences could be significantly contentious.”