Self-employed contractors who work mainly for public sector bodies are losing up to 30pc of their income as new tax rules, effective from April, bed in.
As a result of the changes, external contractors at public bodies are now finding themselves taxed as employees without receiving the accompanying benefits including sick pay and holiday allowances.
Despite Chancellor Philip Hammond’s tax raid on the self-employed being ditched, many contractors are finding themselves paying thousands of pounds more in tax than before the changes.
Prior to April the responsibility for determining whether a contractor lay inside IR35 – and paid a higher rate in tax – lay with the contractor. Now, within the public sector, the onus is on the hiring company, meaning many employers are much more cautious and, some claim, are wrongly labelling contractors as inside IR35. In some cases, hirers are deterred from using external contractors altogether.
New research from IT recruiters CW Jobs, has found 71pc of its clients have seen a reduction in income since the reforms, of which a quarter have seen a reduction of close to 30pc.
Dominic Harvey, a director at CW Jobs, said: “The IR35 changes have clearly had a huge impact and it is really worrying to see IT contractors leave the public sector in their droves.
“We are now facing a perfect storm of a brain drain from the public sector, questions over future project delivery, and an increase in fees from those contractors choosing to stay put: all are a real cause for concern.”
HMRC argue it is only asking people to pay the amount of tax they should be paying, but critics of the system say it is unfair to tax people who do not receive statutory employment benefits as if they are fully employed.
Research by Qdos Contractor, the specialist tax advisers, has also found that the extension of IR35 reforms to cover the private sector is the number one concern for contractors. This was the main concern for 48pc of those surveyed, while Brexit was only the top concern for 7pc.
CEO Seb Maley said: “While murmurs surrounding any changes to private sector IR35 remain rumours at this stage, we urge the Government to learn from previous mistakes and quickly end any confusion and uncertainty on the matter.
One-third of contractors surveyed revealed they would consider employment if private sector IR35 reform is enforced. This sends a clear, strong signal to Government that reform to private sector IR35 should be avoided.”
Earlier this month, Telegraph Money reported the case of Mike Gibson who was fundraising to take the reforms to a court challenge. Tax experts also called for clarity on the rules to avoid the issue of employees being overzealous in their application of IR35 status.