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Winning the Anticipated IR35 War for Talent

Public pressure and a deluge of press coverage about government contractors allegedly using limited companies for tax “avoidance”, has resulted in significant changes in the responsibilities for operating IR35 in the Public Sector.

~ Written by Yannis Kafantaris

A Shift in Responsibility

HMRC believes that only 10% of Contractors who should be working within IR35 rules are actually doing so, and hopes to gain £440m by bringing around 20,000 Contractors into line under the new legislation. At first it seemed that Public Sector hiring Agencies would be responsible for determining IR35 status under the new rules, but in a dramatic and unexpected volte face in December last year, the onus to correctly determine a contractor’s IR35 status is removed from the Contractor and placed on the Public Sector Body who is hiring the Contractor, not the Agency. Inaccuracies will lead to considerable penalties, so the Public Sector is likely to become increasingly risk-averse when hiring Contractors. There are implications for Public Sector Organisations, Agencies and Contractors, but the move could also increase pressure on private sector businesses, as HMRC’s time is freed up to investigate tax in this sector more heavily. There are also concerns that the same laws could eventually be rolled out in the Private Sector.

Square Peg, Round Hole?

The factors for determining IR35 status remain the same as before, only the processes and liability will be different. If the Public Sector Body deems the Contractor’s work to be outside of the remit of IR35, the Contractor determines their remuneration as usual. However, if the contract lies within IR35 territory, the Organisation must instruct the recruiting Agency to deduct PAYE and NI before paying the Contractor wages. Another blow for Contractors is that they will no longer be able to write off 5% against their Corporation Tax to cover the administrative costs of running their company. In the event of an error at the payment stage, it is still uncertain as to whether the Public Sector hiring Body or the Agency will be liable.

While avoiding the penalties may seem the biggest consideration for Public Sector organisations in the short term, in fact, depending on how they choose to manage their Contractors, the biggest long-term issue could be a dearth of quality talent in the Public Sector. If for example Public Sector Organisations decide to try to “play safe” and push Contractors into IR35 to avoid contravening the new rules, this will result in Contractors taking home significantly less pay (around 20%), meaning that suddenly a Public Sector contract seems a lot less appealing.  Indeed there have been reports that droves of IT Contractors have already downed tools on their Public Sector projects, leaving some Organisations uncertain how they are going to complete their projects. In addition, there have been concerns on both sides that the ESS, the new IR35 digital tool, needs refining ahead of the roll-out, as it is producing erratic results that don’t align with the legislation.

War for Talent!

Public Sector Organisations already find it difficult to attract the best talent due to inflexible pay and difficult hiring processes. So what can those Organisations that are concerned about a mass exodus of the best talent, do to mitigate this and work towards delivering great services, increasing business agility, reducing expenditure and transforming the relationship between citizen and state? Well, increasing digitalisation and creating a great working culture are great places to start. Organisations that focus on their DevOps transformation, automating the more menial tasks and utilising smarter metrics and advanced analytics, are definitely going to have a competitive advantage. To discover how you can modernise your Public Sector Organisation to make it a more efficient machine and a more attractive place to work, come along to our webinar “How to Accelerate Digital Delivery in the War for Talent” on 29th March at 11am. You’ll get to hear expert opinions from presenters Jessica Figueras, Chief Analyst at GlobalData (formally Kable); Gary Moore, VP and Testing Services Practice Leader at Sogeti; and Gary Barnett, who leads the Enterprise Advisory business for GlobalData. To register for the webinar follow this link.

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