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A survey from freelancer group, IPSE, has found that over half (54 per cent) of so-called Personal Service Companies (PSCs) working in the public sector would leave the sector if an Government proposal to change how they are taxed is implemented.
Proposal
So-called PSCs are individuals who operate as contract workers through the intermediary of an incorporated business.
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In its latest propsoals, the Government intends to make public sector organisations, or the agency, determine the IR35 status of an engagement, as opposed to the contractor’s company. The client/agency will then be responsible for applying employment taxes to those businesses that are deemed to be ‘caught’ by the new rules. In effect, the Government wants to tax these businesses like employees, without offering any employment rights.
IPSE conducted a survey among independent professionals that aimed to understand how the proposed changes might affect PSCs.
Abandoning the public sector
Nearly a third of respondents indicated that they would no longer work on public sector contracts at all if the proposal is introduced - this is without waiting to find out whether they will be required to pay the same tax and National Insurance as an employee.
Almost a quarter said that if they have to pay tax like an employee, they would terminate their public sector contracts. Only two per cent would continue taking on public sector contracts if the proposal is implemented.
Out of those who indicated they would terminate their public sector contract or not work on public sector contracts at all, four in five would seek out work outside the public sector instead.
Another disheartening finding was that of those who will to leave the public sector if the proposal was enacted, five per cent would retire earlier than planned.
Increase rates
Almost four in ten indicated that they would have no choice but to increase their day rate to compensate for any additional tax liability if the proposal is enacted.
The flexibility and specialist skills PSCs provide are vital to the completion of small and large scale public sector projects. Public sector bodies would have to pay more for their services - which would again increase the cost and strain on public funds - with no benefit to the exchequer.
Contribution of PSCs
A report released by IPSE and Oxford Economics found that PSCs operating in the UK contributed almost £38 billion to UK GDP and created over 600,000 jobs in 2015. Out of this, the 26,000 PSCs affected working in the public sector contributed a huge £3.5 billion to the economy in 2015.
IPSE Chief Executive Chris Bryce said: “This proposal will damage not only the affected 26,000 Personal Service Companies (PSCs) working in the public sector, which contribute £3.5 billion to the economy, but their clients and agencies too.
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“Public services will ultimately suffer most from this proposal. Public sector bodies, seeking to salvage and maintain large scale projects, would have to find alternative resources - or hire PSCs at an increased rate – leading to significant cost to the taxpayer. Even HMRC’s own published research has shown it to be a bad idea. And what of the future? So far this proposal applies to only public sector contracts - but for how long? If these rules were applied to the private sector the consequences would be beyond disastrous.
“That’s why we strongly urge the Government to abandon this proposed change. While IPSE fully agrees that all tax payers should pay the right amount, we believe the Government is going about it in completely the wrong way. The damage this will have on public services and the flexible economy is too great to ignore.
“It is a potentially disastrous step, it is unfair and will be challenged. The immorality of taxing them as employees while denying employment rights beggars belief.”
Case study
Jonathan Bentley, Redwood Technology - “With over 20 years’ experience in my field and much of that time spent in local or central Government, this has created a decision point for my company. There will be no further engagements with Government bodies as the rules have the potential to expose the company unnecessarily, this is a risk we have decided to avoid without exception.
“Considering the tens of thousands paid in corporation tax, dividend tax and personal tax, amongst others, my effective exit will cost the exchequer a considerable amount of money in tax alone. Add to that the loss of consumer spending, it is something I would urge HMRC to take a wider view on, as I will not take regular employment.”
This article provides results from a survey conducted from 14 June until 25 July 2016, compiled from the responses of 829 IPSE members and non-members who have worked on public sector contracts in the last two years.
Background
Leading business groups, including IPSE, REC, ACCA and APSCo recently sent a joint letter to the new Chancellor urging him to rethink the proposal.
See also:Government's IR35 reforms set to decimate public sector contracting - Shout99, Aug 2016
New IR35 proposals for public sector place burden on agencies - Shout99, June 16
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Susie Hughes © Shout99 2016
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