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Public sector contractors may be forced into PAYE under new ‘off-payroll’ rules

Limited company contractors with central government department clients will be subject to new ‘off-payroll’ rules that could force them into PAYE, or out of work. This follows a Treasury review, data from which has been supplied to HMRC to help identify contractors at high risk of being inside IR35.

The Treasury’s new rules say that individual government departments will be required to seek assurances that contractors earning over £220 a day and on contracts lasting more than six months are paying the correct amount of tax. The Treasury’s rules also urge departments to “consider terminating the contract if that assurance is not provided”.

“These new rules will scupper many of the government’s flagship IT projects,” warns ContractorCalculator CEO Dave Chaplin. “What will happen is that the best IT contractors will quickly find private sector contracts, rather than be forced to accept significant reductions in take-home pay.”

Chaplin, a former IT contractor, sees this issue being replicated across all departments and skill sets, not just IT. “Whether it’s interim managers turning around failing projects, engineers overseeing infrastructure development, or finance specialists dealing with large budgets, there’s likely to be an exodus of the best people out of the public sector.”

He fears that it will be taxpayers who ultimately foot the bill: “Long term, the government won’t be able to attract the best talent, directly resulting in failed projects and poor public service delivery.”

PCG’s managing director John Brazier agrees: “We must remember many public sector organisations are currently using [contractors] because it is the best way of getting that particular job done, both in terms of skills and cost to the taxpayer.

“There is a danger that this step by the Treasury will lead to a clamour to introduce new policy that fundamentally fails to differentiate between those who abuse the tax legislation and the vast majority who operate legitimately.”

Alongside the new ‘off-payroll’ rules, the Treasury has published a consultation proposing that legislation be included in next year’s Budget, requiring that “all ‘controlling persons’ must by law be on the payroll of the engaging organisation”.

The Treasury goes on to say that “this change in law will further tighten the rules ensuring that people paid through personal service companies in both the private and public sector pay the right amount of tax.”

An estimated 2,400 contractors, 40% of them IT contractors, are directly engaged by central government departments. Of these, 70% are on day rates in excess of £400 and 40% are on contracts lasting six months or greater.

The new rules are the result of a review commissioned by Chief Secretary to the Treasury Danny Alexander into the use of ‘off-payroll’ workers within the civil service. It was prompted by the ‘Ed Lester affair’ in February 2012.

Published: 23 May 2012

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