Ahead of reforms to private sector IR35 rules, new research shows that several public sector organisations are, in the majority of cases, judging contractors to be inside IR35.

Since 2017, public bodies have been responsible for deciding whether a contractor is truly self-employed or whether they should be taxed as if they were an employee of the firm.

The rules apply to limited company contractors who, before the rule change, were responsible for judging their own IR35 status.

From April 2020, the same reforms will be introduced in the private sector, so that organisations with 50 or more employees will be responsible for judging a contractor’s IR35 status.

When the public sector IR35 reforms were first introduced, experts predicted that many organisations would classify the majority of contractors as inside IR35 to protect themselves from liability.

Figures from Contractor Calculator appear to show that this fear has become a reality.

The Met Office, for example, ruled that 98% of its freelancers were inside IR35. Other public bodies like the Crown Commercial Service (87%), Network Rail (99%) and HS2 (98%) also ruled that contractors should be taxed like employees in the majority of cases.

Initially, HMRC estimated that just one-third of contractors would fall foul of the off-payroll working rules.

Contractors that are judged to be inside IR35 can end up paying significantly more in tax, without enjoying some of the benefits of traditional employment like sick or holiday pay.

Miles Grady, Director of Umbrella.co.uk said: “This is a damning indictment of the IR35 reforms set to be applied to the public sector as well as the private sector.

“I find it difficult to believe that up to 99% of the independent contractors engaged by a public sector body are not genuinely self-employed. So, either they are getting it wrong or the tools and guidance provided by HMRC aren’t up to scratch.

“The situation could be even worse in the private sector, where many firms don’t have the same administrative resources to make these decisions on a case by case basis. HSBC has already announced that they will only engage contractors through a third party like an umbrella company.

“If a contractor is getting taxed like an employee without receiving any of the benefits of employment then they will seriously consider leaving the flexible labour market and taking a full-time position. And who could blame them.”

Contractors operating through an umbrella company are not subject to IR35 judgements because they are technically employed by the umbrella company and receive benefits such as holiday entitlement.

For personalised IR35 advice or to learn more about contracting through an umbrella company, speak to a member of the team today. Call: 0800 121 6513.