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The Government will also lose out on £115m in taxes and could face an increase of £610m rise in costs per year for hiring contractors if these workers are put on the payroll.
These are just some of the findings to come out of a recent contractor survey by ContractorCalculator, and online resource for contractors.
The proposals would place additional responsibilities on agencies to assess the employment status of contractors in the public sector, and many fear would make contractors less attractive or that assessments would favour 'inside IR35' in order to err on the side of caution. See: New IR35 proposals for public sector place burden on agencies - June 16, Shout99.
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“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.”
Earnings
HMRC believes the reforms will yield an additional £400m in tax over the coming tax year from 20,000 contractors. What it fails to account for is the disparity in terms of taxable income earned by contractors and employees.
The survey also sought to glean how much a contractor earns and how much he or she pays compared to a permanent employee. Nearly nine of of ten 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 £31.7m, compared to £50.3m in combined gross fees as contractors which equates to a 58 per cent increase in taxable income earned via contracting.
Contrary to its anticipated £400m tax gain, HMRC faces losing £115m in tax each year by forcing contractors into employment. ContractorCalculator totted up the combined taxes due on the £50.3m contracting earnings of its 500 survey respondents, arriving at £16.8m.
Moving these contractors into permanent employment on lower salaries would result in a tax yield of £13.9m for HMRC from the £31.7m combined earnings – a 17 per cent reduction of £2.9m. 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.
Unworkable
Dave Chaplin said: “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. We know from a National Audit report out earlier in the year that Government projects rely heavily on contractor expertise. The whole point of hiring contractors via personal service companies (PSCs) is the public sector wants contractors, not employees, for short-term expertise on tap. The proposed reforms will cause irreconcilable damage for all involved.
“Contractors were instrumental in helping drag the UK economy out of recession following the 2008-09 financial crisis and following Britain’s decision to leave the EU we find ourselves in a period of uncertainty; now is not the time to be alienating a critical part of the workforce. The UK labour market needs the flexibility and expertise provided by the contract sector but once again the Government is determined to penalise this valuable group of workers. What it fails to see is that it will be losing out itself too.”
Independent review
Employment intermediary trade body, PRISM, said that the survey gave more importance to its recent call for an strategic review of the IR35 employment legislation and that the findings were a startling reminder of the damage being wrought on the flexible economy by a sticking plaster approach to employment legislation.
Crawford Temple, chief executive of PRISM, said: "Contractor Calculator's valuable survey shows just how badly the UK needs an independent strategic review of the kind we are proposing is carried out by the Social Market Foundation to find out what, if anything, should change to ensure employment rules are fair.
"PRISM believes contractors are not being treated fairly. They are a huge boon to the UK economy, filling skills shortages at a moment's notice with no job security and all the while lacking the kind of benefits that permanent employees receive. It is no surprise most will turn their noses up at IR35 rule changes that gift them the worst of both worlds, none of the perks of being employed and none of the benefits of being regarded as self-employed."
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Susie Hughes © Shout99 2016
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