Much has been made about the potential long-term impact of April’s changes to public sector IR35 and perhaps even more so about potential private sector reform, which could still yet be announced next year following the Government’s IR35 consultation.
Prior to changes to the off-payroll working rules in the public sector, leading business voices urged the Government to reconsider, claiming it would spell the beginning of the end for contractors working in the public sector.
Qdos Contractor research carried out before reform concurred to a certain degree. 85% of contractors were prepared to stop working in the public sector for good should they find themselves wrongly placed inside IR35 and therefore forced to pay similar taxes to employees.
And there were concerns for the private sector too. Many believed that a public sector exodus would increase competition for contracts and in turn lower day rates as independent workers fought it out over fewer opportunities.
But as we close in on the end of 2017, and more than six months after the introduction of public sector reform, how have changes impacted the demand for UK contractors as a whole?
Well, just published APSCo data has revealed a 30% drop in the number of IT contractor assignments received by clients in both the public and private sector between October 2016 and 2017.
On the face of it, this does suggest that as feared, IR35 reform might well have left its mark on contracting.
APSCo’s CEO, Ann Swain, echoed similar thoughts.
“The overall fall in contract placements can largely be attributed to a 30% drop in IT assignments. This may, in part, be in response to changes to rules around off payroll working in the public sector which were introduced in April.”
Although, to some extent, a drop in demand for contractors was to be expected following the huge upheaval of IR35 reform. Public sector bodies were – and still are in many respects – inexperienced when it comes to setting accurate IR35 determinations, so some reluctance to engage with contractors in the aftermath of reform was inevitable.
APSCo stats also show a 5% rise in permanent vacancies over the past year, reflecting that a number of companies are leaning towards hiring employees, perhaps as a measure to avoid having to deal with new and unwanted IR35 responsibilities.
However, given the continued rise in the number of self-employed workers in the UK and the undeniable benefits of engaging contractors, companies would be unwise to limit their use of temporary workers.
Despite IR35 liability now hanging over their heads, public sector bodies must think long term. The NHS relies on its locum workers and many Government departments engage with contractors. Ironically, contractors make up a key component of even HMRC’s own workforce.
While the number of IT contractors out on assignment dropped by 30% in the past year, the number of vacancies also decreased by 10%. This is the same level that contractor vacancies across all professions declined. Engineering vacancies dipped by 2%, while finance and marketing suffered larger drops in demand, of 15% and 25% respectively.
IR35 reform might well have played its part in this. But there’s no hard evidence to suggest that changes have been the only influence. Ongoing Brexit, political and business uncertainty each could have contributed.
Given that over half of HR Directors surveyed by PwC expect that at least 20% of their workforce will be made up of independent workers by 2020, a recent dip in demand should be considered a blip as the dust settles on recent reform and public sector engagers.
And if anything, contractors remain resilient. Our own research shows that 61% of independent workers are confident that self-employment will continue to grow despite ongoing tax and IR35 uncertainty. The majority (63%) also believe potential private sector changes could be managed.
However, to ensure for the continued and ultimately increased use of contractors, recruitment agencies have a responsibility to help clients make better informed IR35 determinations. Quite simply it is in their best interests to do so.
Steve Witts, Group Head of Tax and Treasury at Hays emphasised the importance of assisting clients in the IR35 process.
“Hays was swift to identify a future public sector client requirement for outsourcing the determination responsibility of which had been left to them, and therefore harnessed the expertise of Qdos Contractor in order to provide them with a seamless end to end service.”
Despite plans to hold an IR35 consultation early next year, the Government is widely expected to introduce reform into the private sector before long. This simply places greater need for the UK’s 5.5m private sector businesses and the recruitment agencies which serve them to prepare for potential changes.
There’s no doubt that recent reform has had a significant impact on contracting – something also suggested in previous reports. However, with the right measures in place there’s also evidence that IR35 changes can in fact be managed.
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