Lose. Lose. Lose. A public sector talent drain, reduced quality public service delivery, and higher costs for the taxpayer: Those are the only possible outcomes if the government presses on with its plans to introduce its hastily cobbled together ‘off-payroll’ rules.
The rules will force limited company contractors in the public sector into IR35 or onto Pay As You Earn (PAYE) payrolls. And, when you look at the numbers, which we’ve worked through in the table below, the following becomes apparent:
- Contractors forced onto the payroll or into IR35 will lose up to £9,232 a year in net pay. And remember this net income has to pay for contractors’ holidays, sickness and other benefits that employees take for granted (and don’t have to fund themselves)
- To maintain that level of net pay by increasing gross fees, the costs of hiring the contractor increases by £15,395 a year.
The realities of the UK’s labour market simply won’t support the imposition of these new rules without consequences. By imposing huge pay cuts on its vital contract workers, the government will:
- Lose valuable specialists in key delivery areas, such as change management, HR and IT; these are precisely the areas most likely to derail high profile public sector projects
- Lose service quality standards, because it will be unable to deliver vital projects and will only be able to hire replacements with mediocre talent prepared to accept less than market rates of pay
- Lose taxpayers’ money because of the cost of hiring replacements, the cost of failed projects and the increased cost of paying talent more to stay on inside IR35.
It takes a reactive and ultimately short-sighted government to push through such a damaging policy. The only possible win in this lose-lose-lose scenario may be that the government buys itself what will be some very short-lived positive press resulting from the Ed Lester affair and the resulting furore over ‘off-payroll’ workers.
The matter could have been dealt with quickly and easily at the time, by the government insisting that HMRC implement existing IR35 rules for those ‘off-payroll’ public sector contractors who may actually have been ‘disguised employees'. Instead Chief Secretary to the Treasury Danny Alexander commissioned a review, and appears keen to implement its recommendations for new rules.
If Alexander presses on, it won’t just be the government that endures the greatest loss. No, the new rules ensure that it is us taxpayers who will lose. And lose. And lose.
| 1. An employed civil servant on PAYE | 2. A contractor trading as a limited company | 3. When IR35 applies | 4. IR35 after a pay increase | |
|---|---|---|---|---|
| Revenue | 65,198 | 65,198 | 80,593 | |
| Salary | 58,200 | 9,000 | ||
| Employers NI | 6,998 | 208 | 7,115 | 9,284 |
| Cost to Government | 65,198 | 65,198 | 65,198 | 80,593 |
| Employees NI | 4,501 | 169 | 4,340 | 4,654 |
| PAYE | 13,163 | 179 | 10,509 | 16,795 |
| Corporation Tax | 11,198 | |||
| Tax on dividends | 3,585 | |||
| Total taxes collected | 24,662 | 15,131 | 23,563 | 30,735 |
| Worker - Net Income | 40,535 | 49,858 | 41,635 | 49,858 |
Commentary on Table 1
The new rules say that any contractor trading via a limited company who is billing more than £220 per day, or on an assignment lasting more than six months, will come under the spotlight. Government departments must seek assurances that such contractors are paying the correct amount of tax, or the Treasury demands that departments “consider terminating the contract if that assurance is not provided”.
So how does the lose-lose-lose scenario come about? It helps if you look at some of the numbers involved in this table. Column 1 shows us how much a civil servant on £58,200 a year pays in tax (we chose £58,200 as the benchmark for this analysis because that’s the threshold salary at which the new rules kick in). One thing to note is that employees don’t just cost their public sector employers their salary. You need to add employers’ National Insurance Contributions (NICs) on top, plus the costs of employment rights such as holidays, sickness, pension payments and other benefits. In cash terms, a civil servant on £58,200 actually costs £65,198-plus.
We then look at several scenarios for a contractor’s earnings: column 2 is a contractor being paid fees of £65,198 (the same gross cost of hiring a civil servant employee). Column 3 is a contractor considered to be a ‘disguised employee’ and paying tax under the IR35 rules. We’ve treated ‘paying the correct amount of tax’ as meaning ‘paying tax like an employee’, hence the use of IR35. The final column 4 is the same contractor inside IR35 but after a pay rise that takes their net income after taxes back to the same as column 2.