April 6th 2017, the day the public sector has been dreading for months, the day most assumed would never come, the day IR35 becomes the responsibility of all public sector agencies.
There are close to 50,000 personal service companies currently supplying services to the public sector and this legislation will have lasting consequences for every one of them.
Whereas in the past the onus has been on the individual contractor to effectively comply with the HMRC’s guidelines on applying PAYE and National Insurance, from April it will become the responsibility of all public sector agencies.
All government bodies, including the likes of; Network Rail, HS2, Highways England, Crossrail and TfL will have to decide if the contractor is legitimately self-employed or if they are subject to PAYE and National Insurance contributions. If the latter applies, the company will need to employ the contractor directly and withhold PAYE and NIC’s as well as pay employers’ NIC on these payments.
With more than half of contractors saying they will not continue their contracts in the public sector if the changes come in to effect*, what will it mean for the transport & infrastructure industry?
The obvious risk for freelancers is that many won’t be genuinely self-employed. Many won’t pass the test and will face having to become permanently employed, or alter the way they work and/or who they work for.
Choosing to go down the employment route means that they will be taxed a lot more and see a significant reduction in their net income.
So, if this isn’t feasible, they can opt to walk away from the public sector altogether and take their services to the private sector. 23% of freelancers surveyed said they would no longer undertake work for government agencies if they were taxed like an employee. The worry here, is that if hundreds of freelancers walk away, it could spark the introduction of the legislation in to the private sector as well.
The options to avoid becoming an employee for freelancers are essentially;
- To take their services to the private sector, assuming the private sector will have them.
- To contract with the public sector via an umbrella company or a consulting firm, trying to cut the best deal they can.
- To prove they meet the requirements of an ‘IR35 friendly’ contract by only taking on shorter term contracts when working on government assignments, restricting exclusivity and always ensuring contracts avoid a ‘right of control’ clause – a contractor should not directly report to a senior member of staff within the organisation.
- Or…many may opt to retire.
Public Sector Bodies
The big issue for public sector bodies is the sheer quantity of freelancers they use, particularly at senior levels. Employing someone on an interim basis has been a cheaper way of recruiting the experienced professionals, particularly in niche areas with big skills gaps.
Bearing in mind there are over 2,000 people at TfL alone being paid via a personal service company, of these, almost 400 are earning over £100,000 a year**. The freelance staff numbers for HS2, Network Rail and others might not be at the TfL level but will still be in the hundreds for each company.
Just consider the admin costs in managing the monumental task of assessing and implementing any changes, without taking in to account the unwanted hassle and time lost.
Then, once individuals have been assessed, if they are not deemed to be legitimately self-employed, there is the question of how to proceed; employ them on a permanent contract, or, if they decline, recruit someone in their place.
TfL and Network Rail initially announced a blanket ban last month on limited company contractors, taking a “like it or lump it” standpoint. TfL have since back tracked slightly saying that if the individual is critical to TfL then all options will be considered to retain their services.
On average, the HMRC’s Employment Status Indicator (ESI) will pass around 30% of contractors’, fail around 30% and 40% will be borderline***. Potentially, a lot of contractors will be issued the ultimatum – stay or go.
If, and that’s a big if, they chose to convert to perm, the public sector body will have to take in to consideration the costs that come with full-time employment. Bonuses, car allowances, pension contributions, healthcare costs and travel allowances will all need to be paid on top of a salary that is mutually agreeable to all parties, in addition to the employers National Insurance contribution that will need to be paid.
And, more likely, if there is a mass exodus and government agencies are left with a whole host of gaps to fill, there is the challenge of recruitment. Ignoring the price tag attached to filling so many roles, if companies are to stick to current pay scales, they risk having to sacrifice the quality of the candidates in order to stay within their salary budgets.
The legislation will also make freelancers think twice before contributing to many of the big infrastructure projects that would once have been a very attractive career move. Projects like HS2, the roads investment programme or Northern Powerhouse are likely to lose out on valuable freelance contractors for fear they won’t pass HMRC’s rigid guidelines.
Private Sector Businesses
The private sector can go down one of two roads. The first is to take advantage of the influx of freelance talent that will be available. Suddenly, private sector organisations are going to be very attractive places to work and they will have the pick of the freelance market.
Not only this, but many consultancies might take this opportunity to snap up freelancers who have recently vacated a role and sell them back to the public sector bodies on secondment. The freelancer might retain self-employed status, the consultancy will make a profit and the public sector body will retain the individual. Win, win, win – almost, except the public sector will be paying more for the same individual.
The second option for the private sector is to see this as a chance to take a stand by reducing the number of freelancers they rely on and start to make a shift to employing all new recruits on a permanent basis. After all, they too could be facing this same predicament in the future if the IR35 test is extended to private sector employers.
However companies and individuals chose to adopt the legislation, one thing is for certain come the 6th April the transport and infrastructure industries are going to face some major changes.
If you are looking at ways to reduce your reliance on interim staff at senior level please get in touch HERE to see how we can help.