Public sector contractors could soon be forced to increase their rates or leave altogether, as Government policy continues to increase the costs of contracting in the public sector.
If proposed public sector IR35 reforms go through, it will mark the latest in a raft of measures that drive up tax, reduce net income and restrict the means of engagement for public sector contractors.
“There has been a disproportionate tax attack on contingent workers in the public sector, and the Government needs to understand the damage its policies are causing,” warns ContractorCalculator CEO Dave Chaplin.
And research by the Freelancer and Contractor Service Association shows how widespread this damage may be, as recently implemented policy initiatives look likely to force contractors to act, potentially compounding existing skills shortages in the process.
IR35 changes more extreme than previously thought
Beyond simply issuing end clients with the responsibility of determining a limited company contractor’s status, HMRC and the Treasury have recently suggested that a Real Time Information (RTI) solution will be imposed upon contractors found inside IR35.
“These latest proposals would ensure contractors are taxed like employees without providing them with the same employment rights,” highlights Chaplin. “Why on earth would any contractor agree to such a lose-lose situation?”
Many contractors have just lost out on travel and subsistence (T&S) expenses tax relief, whilst the Government has also recently introduced pay caps for locum workers in the health sector.
This latest announcement targets public sector contractors who trade via their limited companies. As Chaplin points out, HMRC’s attempt to ‘level the playing field’ does not seem to take into account the dividend tax hikes that took effect from April 2016.
It also comes just a few months after a National Audit Office (NAO) report attributed rising contractor use in the public sector to poor workforce planning – seemingly reaffirming the Government’s negative perception of the contingent workforce.
Healthcare sector most severely hit by public sector changes
According to the research, there were 116,000 self-employed health professionals in the UK in Q2 2015, including 43,000 locum doctors, and a further 41,000 associate health professionals.
Worryingly, research by Aldwych Partners that determined that more than half (53%) of locum doctors claimed they would seek work outside England if the now mandated pay caps were introduced. This was also in advance of changes to T&S and the proposed changes to contractual means of engagement.
Meanwhile, an 18,000 rise in the amount of British teachers working in international schools overseas between 2013/14 and 2014/15 suggests education may be another sector where UK public policy is deteriorating an already depleted talent pool.
Problem likely to intensify unless changes are made
This is indicative of a wider problem. Overseas opportunities become an increasingly tempting proposition for contractors for as long as the Government continues to enforce stricter policies.
Looking ahead to the future, the problem could intensify. International schools are projected to double to more than 15,000 by 2025. Couple that with the fact that university tuition fees in the UK currently stand at £9,000 a year, an increasing amount of future contractors are expected to study – and subsequently work - overseas, intensifying UK skills shortages.
“People have choice, and the lure of international working, particularly for our emerging professional workforce, should not be underestimated,” concludes CEO Julia Kermode.
Contractor rate hikes offer a likely alternative
“Making risk averse engagers responsible for IR35 status will only result in compliant contractors being unjustly forced onto the payroll,” notes Chaplin. “From there on we will either see contractors increase their rates to counteract the additional tax, or we will see an exodus from the public sector.”
Chaplin claims contractors deemed to be within IR35 will be required to increase their daily rates by 23% in order to account for increased taxation whilst ensuring they retain the same amount of take home pay.
This is a substantial amount, but not an altogether unlikely one if the only other alternative to remain in the public sector is to blindly accept an unjust tax hike.
He concludes: “It’s up to all of us to highlight to policymakers, the Treasury and HMRC how much damage these proposals will do to the costs and frontline delivery of public services. That way we might prevent them from happening in the first place.”