The Government’s crackdown on “disguised employment” has officially begun with a change which comes into effect from next week that will see tens of thousands of public sector contractors have their net take home pay slashed by as much as 20 percent.

Now the responsibility for deducting income tax and national insurance will shift from the individual contractor and onto the public sector body or the agencies supplying them. The onus will then be on these organisations to decide whether assignments undertaken by workers operating through personal service companies (PSCs) fall inside or outside IR35.

As a result of the incredibly short time frame to prepare – the final legislation was issued on 20 March and comes into force on 6 April – and wary of the risks of getting the assessment wrong, the vast majority of public sector bodies are applying a ‘broad brush’ approach and stating that all roles will fall within IR35, without a full assessment being undertaken.

This will mean employer and employee NI and PAYE income tax will be deducted from all the payments which contractors might legitimately have been able to treat as dividends. The result: a net pay cut of 20 percent for a typical contractor earning £700 per week.

The comparison is complicated and varies with the amount of pay, with the gap being higher for higher paid workers. As a general guide, the main difference is that employer and employee national insurance is paid on the full payments received where work is within IR35. After certain thresholds are taken into account, employee and employer national insurance can be a cost of about 15 percent. Then there is a difference in the income tax rates applied to higher earnings (40 percent) versus profits and dividends which are at a lower rate.

Victoria Short, MD of Randstad Public Services, comments: “The fallout of the new off-payroll rules has already begun, and we’re seeing public sector organisations take an overly-cautious approach. Organisations are now under significant pressure to increase pay to retain talent, stretching already squeezed public sector budgets. They simply haven’t built these costs into their models. The knock-on effect is many will look to the private sector for new opportunities, further fuelling the skills shortage in the public sector.

“Yes, there was tax abuse by some contractors, but delegating assessment to hiring parties in an area of employment tax that is complex – and in which HMRC itself has had limited success – seems an unfair burden. It looks as though only a few roles will be considered as being outside IR35 – those that are project based by workers with an expertise the organisation does not have internally. These projects are likely to be priced on output.”

“Contractors affected might benefit from seeking advice from an accountant to see if they can change the way they do the assignment, such as taking on more financial risk or how they present their work, to support the position they are genuinely ‘in business’. This might include charging based on a price per project rather than a day rate.”