At a recent compliance seminar, HMRC confirmed that the rules relating to IR35 for public sector contractors were going to change in the near future. Contractors, including IT contractors, associated with the public sector have to plan for these changes and make sure they take measures to protect themselves from financial tax risk.
During the 2016 Budget, the former Chancellor, George Osborne, announced a consultation for contractors working in the public sector. This consultation has paved the way for agencies and end-clients to determine the employment status of contractors for tax purposes. However, the proposals have been criticised by the industry, and many have pointed out the disadvantages that contractors working in the public sector will face.
However, HMRC representative Philip Horswill stated that the reforms for the public sector contractors were necessary to bring about parity throughout the tax system. He emphasised that HMRC was not looking at grabbing money.
The tax authorities have estimated that just 10 per cent of contractors pay the correct taxes, and this has resulted in about £400 million in losses in 2015-16 due to non-compliance with IR35.
However, IR35 experts do not agree with the estimates of HMRC. IR35 expert Kate Cottrell stated that until 2012, 90 per cent of contractors working in the public sector were compliant with the rules. She also disagrees with HMRC, which has estimated that 20,000 contractors will be affected by changes to IR35. Cottrell believes that far more contractors will be impacted because of the huge scope of the public sector.
Horswill allayed fears relating to a roll-out for contractors in the private sector by saying that proposed changes to IR35 would not apply to contractors in the private sector.
The new rules covering public sector IT contractors and other contractors are expected to come into force from April 2017.