Reforms to 'decimate' Government services as IT contractors prepare to abandon public sector

80 per cent of contractors are planning on leaving the sector rather than accepting a contract inside IR35
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Government services will be 'decimated' if proposed reforms to IR35 in the public sector go ahead, with 80 per cent of contractors planning on abandoning the sector rather than accepting a contract inside IR35.

That's according to a report from online resource ContractorCalculator, which also says that the Government will lose out on £115 million in taxes, and could face a £610 million rise in costs per year for hiring contractors, if these workers are put on the payroll. 

The survey questioned more than 500 contractors.

89% of contractors said they earn either the same or more than they would do in permanent employment. Overall, the expected combined total salaries of all respondents if placed in permanent roles amounted to £31.7 million, compared to £50.3 million in combined gross fees as contractors (which equates to a 58 per cent increase in taxable income earned via contracting).

The Register is also reporting that around 90 per cent of UK government IT contractors will oppose HMRC proposals to clamp down on self-employed workers not paying the right tax.

89% of contractors said they earn either the same or more than they would do in permanent employment. Overall, the expected combined total salaries of all respondents if placed in permanent roles amounted to £31.7 million, compared to £50.3 million in combined gross fees as contractors.

This equates to a 58 per cent increase in taxable income earned via contracting.

Dave Chaplin, CEO and founder of ContractorCalculator, commented: “We’ve always said that the proposed measures are fundamentally flawed and now we have the figures to prove it.

"HMRC’s naïve conviction that contractors are going to roll over and accept these new conditions is going to have disastrous unintended consequences.

"Four out of five respondents said they would turn down an inside-IR35 role and seek opportunities elsewhere because a typical contractor would have to increase his or her fees by 30 per cent to earn the same income if deemed to be inside IR35.

“HMRC’s proposed reforms hang on the premise that contractors will readily accept having the same amount of tax deducted as employees, without receiving any employment benefits such as sick and holiday pay.”

HMRC believes the reforms will yield an additional £400m in tax over the coming tax year from 20,000 contractors.

But ContractCalculator says that HMRC faces losing £115 million in tax each year by forcing contractors into employment. ContractorCalculator totted up the combined taxes due on the £50.3 million contracting earnings of its survey respondents, arriving at £16.8 million.

Moving these contractors into permanent employment on lower salaries would apparently result in a tax yield of £13.9 million for HMRC from the £31.7 million combined earnings – a 17 per cent reduction of £2.9 million.

"However, assuming this trend is consistent across the public sector contracting workforce, the consequences for HMRC become far more severe and could cost the Government £610m more each year to hire the same people," ContractCalculator said in a statement.

Chaplin added: "The reforms are quite simply unworkable and will lead to an exodus of talent that will have a significant impact on an already stretched public sector. The proposed reforms will cause irreconcilable damage for all involved."

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