The impending changes to IR35, which will mean a hefty tax hike for contractors, has already hit a number of public sector bodies, with Transport for London (TfL) among the organisations affected, when it was forced to shelve a major IT security project after key staff walked out.
The changes to IR35 come into effect in April, and many contractors across the public sector are already making alternative arrangements - by quitting for better paid work elsewhere.
The news comes from sources speaking direct to V3.
One source claimed that TfL had to shelve plans for a cyber security project because a senior information security specialist has walked away from a long-term project. According to the source, the project will be halted until they find other resources, but this will be tougher than before because contractors will be deterred by the incoming regulations.
The source also suggested that another public sector organisation, which has already struggled to recruit people into its cyber security team, will also be hit by the changes to IR35.
It only has 10 of the 20 cyber security positions filled, with seven of the 10 employees contractors who are likely to walk out of the organisation when IR35 comes into effect next month, our source said.
These aren't the only examples. In February, a team of 30 personal service company (PSC) contractors decided to abandon an over-running NHS IT project at the Guy's & St Thomas (GSTT) NHS trust because they would be declared ‘inside IR35' from April. ContractorUK stated that the 30-strong team would leave to pursue other projects.
Vince Warrington, director of Protective Intelligence, believes that this could lead to a cyber security crisis within the government, particularly as many senior cyber security executives, such as chief information security officers (CISOs), are brought into the public sector on a contractual basis, while the public sector body in question tries to hire someone on a full-time basis.
He states that the changes to IR35 will mean that people who used to be able to take up public sector roles and earn a good day-rate or contractual salary will be heavily affected, forcing them to look for work in the private sector.
"They will be hit for an additional several thousand pounds in tax if they stay in the public sector. They may have wanted to work in the public sector to gain security clearance or because it was a good place to work before, even if the rates were not as high as the private sector, but now the increase in tax means the public sector will lose access to those people," he said.
But Warrington also emphasised that it wasn't only IT and information security that would be hit by IR35; nurses, local doctors and social care workers will also be affected by the ‘disguised employment' tax avoidance scheme.
Tax advisor Qdos Contractor found that 85 per cent of public sector contractors would leave their jobs if their taxes were forced up by IR35. Nearly all (95 per cent) of the 2,000 UK contractors it surveyed suggested that public sector projects would suffer as a result.
The new legislation will come into force on 6 April. It will mean that public sector organisations will determine the amount of tax and National Insurance contribution (NIC) that a person running a limited company is likely to pay and dock it from payments accordingly.
The aim is to target tax avoidance by self-employed contractors that set-up limited companies to pay themselves via dividends that are not subject to National Insurance, rather than being taxed like an employed worker. This means that contractors in the public sector will end up being taxed as if they were employed - with none of the benefits.
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