IR35 in the public sector – 18 months on

The IR35 application changes provoked debate aplenty over the future of contractors in the public sector. Many prestigious parties have suggested these reforms would provoke a ‘mass exodus’ from the field. 18 months on from implementation, we take a look at the current impacts and future outlook for independent professionals.

By introducing the IR35 application changes, HMRC were hoping that the public sector would effectively self-regulate IR35. Since April 2017 there’s been significant confusion over how the changes would be implemented by public sector organisations. Especially as many of them remained woefully unsure of their compliance requirements. As we explored in our previous article, as public sector bodies and agencies faced significant liabilities, many chose to take rash risk-averse measures when it came to determining a contractor’s IR35 status.

ContractorCalculator’s survey certainly seems to suggest an exodus was underway. With 76% of public sector departments losing highly skilled contractors (61% citing their reason for leaving as refusal to work under IR35). Their findings also hint at delays and cancelled projects as contractors seemed to turn their backs on the public sector in favour of the private. On the opposite side of the fence, HMRC have been quick to dismiss these findings, stating they’ve seen no evidence of ‘a drift from the public sector’ and suggesting ContractorCalculator’s results are from an unrepresentative and disproportionate sample.

Certainly, it seems inevitable that the public sectors draconian blanket bans would have seen contractors voting with their feet and walking away. Thankfully, the majority of these decisions have since been overturned; with culprits such as the NHS and TFL releasing statements that they’d now be carrying out IR35 decisions on a case-by-case basis (as mandated by HMRC).

Unlike the private sector which is naturally capitalistic and will always take a (sometimes too) optimistic approach, the public sector is risk-averse. It was no true surprise that they’d don black-hat thinking and make shortsighted decisions to protect their liability. They’ll now be seeing that in order to continue sourcing the best talent, they need to be making well-informed and accurate decisions about IR35. Contractor’s have a vital role to play in facilitating understanding in both sectors.

89% of public sector contracts outside IR35

It’s important to remember that taking a public sector contract doesn’t automatically mean you’ll be working inside IR35. Now the initial panicked reactions have settled down, should your contracts have previously been correctly outside IR35, they should remain so. Expert tax advisors Qdos Contractor, recently reported that 89% of public sector contractors have ‘passed’ their rigorous IR35 assessments since April (meaning their contracts were outside IR35). Here at inni, we have several clients who have contracts outside of IR35 with HMRC who have reported no fundamental changes in their renewed contracts.

When it comes to taking contracts within the public sector the main issue that remains is the lack of understanding and experience of those now making the assessments. As a community, contractors can help to facilitate this change by supporting public sector engagers to take the right measures.

Contractors now need to be pushing for fair assessment of their IR35 status, not just accepting an inside verdict from a needlessly risk-averse procurement team. Using an independent firm, to assess your contract’s IR35 status provides peace of mind for everyone involved.

The chances are that you know far more about IR35 than your end-client. With a firm understanding of IR35, contractors can help to educate their clients; ensuring clients are making well-informed decisions. By understanding how to discuss and test the status of your contracts appropriately, you can hold open conversations and negotiations to ensure you’re both being correctly assessed and are working to the best-suited contract possible.

The benefits of the public sector

The public sector will continue to have a wealth of interesting, appealing and socially rewarding contracts, often without the cut-throat atmosphere that can come with big competitive private businesses. There’s no denying that the sector has seen a huge increase in demand for temporary and contractor staff (which currently sits at its highest point since July 2015). Skill shortages remain prolific, especially for the likes of cybersecurity specialists following recent high-profile attacks. There will long be significant demand and need for contractors in the public sector.

Regardless of any tax reforms, self-employment remains as popular as ever – increasing over the last year by 148,000 to 4.80 million (that’s 15% of the workforce). A recent study by the McKinsey Global Institute also found that 97% of contractors are much happier than their permanently employed counterparts. This certainly tallies with what we hear from our own clients who see contracting as the best route to a higher income, more creativity and control in their work and a better work/life balance. As the incentives of becoming an independent professional remain and competition continues to rise, public sector contracts are not to be sniffed at. Especially when successful negotiation and open conversations could ensure your contract is outside IR35.

Why make the extra effort when I could just go private?
Well, firstly you’ll be able to secure that attractive public sector contract your competition will be overlooking. Secondly, retreating solely to the private sector is not a long-term solution: you’ll soon need to know how to discuss IR35 and negotiate your contracts with your clients and agent in the private sector too. So why not beat the competition while they’re still panicking?

Facilitating change

When it comes to the future of contracting in the public sector the picture is nowhere near as bleak as some might be painting. While we initially saw teething problems in the form of rash blanket bans, as the dust begins to settle public sector authorities will be looking to retain their access to the wider talent market.

Going forward the challenge lies in ensuring public sector bodies are making accurate and educated decisions when it comes to assessing the employment status of their independent workforce; an area most will be woefully uneducated in. Contractors can help to facilitate this change by having informed, open discussions with our clients.

IR35 is here to stay, and we’ll likely soon see the public sector application changes applied to the private sector. As a contractor, you need to know how these changes impact you and how to successfully discuss the subject with your client or agent. Not only will this help to negotiate the best contract for you, it will also set you miles ahead of the competition.

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