New research published by The Association of Professional Staffing Companies (APSCo) has revealed the after-effects of recent public sector IR35 changes.
Offering fresh evidence that reform has left its mark on public sector contracting and recruitment, the research also strongly contradicts HMRC’s adamant claim that reform has not impacted our sector at all.
Public sector placements decrease
Approximately 70% of APSCo members reported a decrease in the number of contractors placed since the changes were introduced in April of this year, while 43% of recruiters have experienced an alarming drop of at least 25%.
One unnamed member criticised the changes, and the confusion which defined the run-up to April 6th – the day of reform:
“The whole thing is a mess – poorly thought out. Lots of expertise has been lost in the private sector along with an increase in charge to the public sector.”
Number of PSCs placed drops 50% in a year
In addition to the worrying decline in the number of contractor placements, over 50% of APSCo members highlighted the drop in the number of contractors working through Personal Service Companies (PSCs).
As of April 2016, over half of survey respondents stated that 75% of the contractors placed in the public sector worked through their individual PSCs. A year later, this figure had dropped to 20% – a 50% change. This suggests that many independent workers have resorted to working through Umbrella companies, a theory backed up by the 82% rise in number of umbrella employed contractors.
On the face of it, working through an Umbrella company might result in less hassle for contractors but it doesn’t allow contractors to benefit from the full range of tax benefits available when operating through a limited company.
Umbrella companies deduct PAYE and NICs from salary, plus their fee. For contractors to continue working outside IR35 in the public sector and maximise their earnings, the focus should be on making better IR35 decisions.
Concern over public sector expertise
IR35 legislation is complex, and many public sector companies and agencies lack the in-house resource and expertise to make accurate decisions. This is echoed by 51% of recruitment professionals who believe their public sector clients do not have access to the tools and expertise needed to make correct off-payroll determinations.
43% revealed concerns over HMRC’s CEST tool, which they do not trust to produce reasonable decisions in light of the factual realities of placements. It’s clear the rigidity of the tool simply doesn’t work when put into practice in the real world.
Recent Qdos Contractor research highlighted that massive distrust in the CEST tool extends itself to contractors too – 85% of whom do not believe it capable of making accurate IR35 assessments either.
Recruiters are also in agreement with contractors that changes have negatively impacted the public sector itself. Another unnamed APSCo member elaborated:
“The negative impact on the public sector has been huge – partly due to the fact that many contractors might leave the sector, but primarily because the majority of the clients do not understand the changes and are still either making blanket decisions or doing what they can to ensure the roles fall inside the legislation, for whatever reason. Many managers who understand the role in detail are having status decisions overruled by either procurement or finance.”
Recruitment costs increase as a result of reform.
45% of APSCo members have experienced a rise in the cost of resourcing contractors since April – 46% of whom revealed charge rate growth of more than 15%.
83% of recruiters put rising rates down to scarcity of resource and the costs associated with public sector clients absorbing employers’ NICs. Notably, APSCo members believe that costs will remain high, and they do not expect them to return to pre-reform levels.
Despite HMRC’s insistence, this research suggests that IR35 reform has permanently changed public sector contracting and recruitment.
Calls to head off potential private sector reform
That 78% of survey respondents agree that potential private sector reform would affect the ability of the UK economy to source flexible labour speaks volumes.
One member criticised IR35 reform for reducing the benefits of independent working, without offering anything in return – an opinion 95% of contractors surveyed by Qdos Contractor agree with.
“If it (reform) gets extended to the private sector it will take away a flexible way of working. The way it is currently, if a role is caught by IR35 they lose tax benefits but are not given the benefits afforded to permanent employees, which cannot be desirable going forward. There needs to be a compromise and those who want the flexibility should be given some benefit for the risk they take.”
Although ill-advised, private sector reform is largely expected to be introduced in due course. And the upcoming Budget on 22nd November does present an opportunity for the Government to announce any further changes. That said, our sector remains in the dark over if and when plans to extend IR35 reform will be unveiled.
Despite fears, current and potential reform – should it take a similar shape – can be managed. It would fall upon public sector clients and agencies to take great care when setting the employment status of contractors.
To protect the UK’s contractor workforce, and in turn the business interests of public sector companies and agencies, it’s never been more important for end-engagers to make accurate IR35 decisions – and ones which are made on an individual and case-by-case basis.