UK government departments are advising IT contractors to increase their fees by a fifth in an attempt to stop self-employed tech freelancers from leaving the country due to a forthcoming tax clampdown,
According to multiple sources that spoke to The Register, changes by HMRC in April will shift responsibility for compliance with the intermediaries legislation, known as IR35, from the individual contractor to a public body or recruitment agency. A leaked document of the Government's Digital Strategy shows that central government currently has 18,000 digital contractors on its books, but the number of these contractors across the public sector is understood to be much higher.
The government hopes that this change will raise £400m as it targets 20,000 public sector contractors who, under IR35 rules, should be paying the right tax. HMRC however believes that only 10 per cent of these contractors apply the rules.
One source said: "There's been some talk that departments will up the rates by 20 per cent so they don't lose key contractors – but I think most are still waiting on HMRC to see exactly what's happening. It's an utter shambles."
The source also said that losing thousands of IT contractors would have a major impact on government IT programmes. "I wonder if some big companies just happen to be waiting in the wings to come to the rescue. Funny though how so many of those companies don't pay corporation tax in the UK, unlike SMEs."
Contractor Calculator CEO Dave Chaplin said that he had heard of similar plans, and that government departments are advising contractors to raise fees by around 20 per cent as a means of retaining talent. A survey of 250 public sector IT contractors carried out by the site found that only 10 per cent intend to pay the extra tax, with the rest either going to the private sector or setting up their own organisations.
HMRC is currently developing a digital tool to help contractors determine whether they are eligible to fall within IR35's scope. Chaplin however has cast doubt on the tool's use and whether it will be ready in time. A private beta is expected this week with a public beta to follow at the end of next month.
"They have left very little time to test the digital tool considering the changes come into force this April."
One anonymous contractor said that many of their peers believe it will be easier to work for the private sector, rather than increase their fees.
"It's so much easier to move, given how in-demand our skills are."