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United Kingdom

27 Feb 2017

IR35 reform drives public sector costs up

Upcoming tax changes in the United Kingdom could result in thousands of workers of the public sector getting their salary slashed by almost 30%. Employees who are going to be affected by the change will belong to sectors like the NHS, army, schools, police, councils and transportation. Those workers are joining various public sector establishments through personalised limited companies or other intermediaries.

The UK government has already planned changes in the IR35 tax system and will put them into effect in April. The IR35 is the code name for the intermediaries’ legislation that was introduced in 2000 to tackle the problem of “disguised employment”. The reformed IR35 states that the subtraction of tax and national insurance contributions from a worker’s salary will be done, from now on, at the source instead of allowing workers to calculate their own taxes. Also, public sector clients reserve the right to determine which of their workers are in or out of IR35 limits.

IR35 reform is expected to drive up costs in the public sector, especially in the already problematic NHS. A massive transfer of workers to the private sector is also anticipated since doctors, nurses and IT specialists will find it very easy to get a new and better paid job. A petition against the reform in the UK Parliament site has gathered more than 27.000 signatures with a target of 100.000 until 28th April.

UK government says that 90% of employees under IR35 rule don’t pay enough taxes and that Treasury has estimated a 400 million pounds loss in a year. An HM Treasury spokesman, talking to journalists, said that two persons that do the same job should be paying the same taxes and that changes will make sure that this happens. When he was asked, he declined to comment if there has been an assessment of the implications that the reform will have for public sector budgets and workers.

People that work in the tax and recruitment sector are puzzled about the reform. Alex Cobham of the Tax Justice Network accused the government for populism and for ill planning that is not going to make things any better. Recruiters say that their agencies are not so well informed about the upcoming changes and this causes a lot of problems in their job. The lack of information has created a widespread confusion to agencies and especially contractors which don’t know what will be their tax obligations in the future. Recruiters are still waiting for an online tool, promised by the UK government, thanks to which they will be able to determine which workers should start deducting taxes and contributions at the source.

Last year about 100 freelancing BBC presenters were investigated by the tax authorities over whether they were paying the correct amount of taxes. Experts in the recruitment market have said that 30% of contractors will desire no more to work in the public sector. From the remaining ones, 25% will increase their daily rate.