Contractors' Questions: Will clients up rates to cover IR35 getting tougher?

Contractor’s Question: Can’t I just head off having to consider moving to an umbrella company by getting my public sector end-client to raise my pay rate equivalent to the amount of extra tax I’ll potentially face if I stay as a PSC post-April 6th?

Expert’s Answer: Before exploring what public sector bodies (PSBs) are likely to do from the date that the reforms to IR35 take effect, it’s worth considering what they’re saying.

Broadly, they disagree with these changes and appear sympathetic to their PSC contractors. They seem nervous about how PSC contractors are going to react and are equally anxious about their future ability to attract the skills they need.

Less positively for you though, HM Treasury made clear at the outset of the consultation process that “no additional funding would be made available to compensate contractors for the loss of gains made as a result of tax avoidance”.

The PSBs we are engaging with tend to fall into three categories.

  1. They are sympathetic; don’t want to lose unique skills and are exploring doing all they can to keep hold of you.
  2. They are preparing to follow due process; will take no risks, meaning they’re leaning towards pushing you and all their PSCs inside IR35 or through umbrella employment.
  3. They thought the proposals would be delayed so haven’t yet thought about the impact, so there is no detail about your rates/payment post-April 6th.

As to your specific question about increasing your own individual pay rate, my thoughts on that are always ‘if you don’t ask; you don’t get!’

However, to give you a rough idea of the large impact on your take-home pay that the April changes to IR35 in the public sector will have, consider:

Contract revenue £100,000
Salary £11,000
Pre-6th April 2017 (net) £68,117
Post-6th April 2017 (net) £59,356
Revenue required to maintain pre-6th April 2017 income £120,000
(2016/17 tax and NIC rates used)  

In time, this significant financial impact should settle down, but it’s likely to take many months. It’s also likely that there won’t just be one, single way PSBs will respond, given that they’re acting in three different modes (outlined above). Ultimately though, if the public sector needs niche skills on a flexible basis, then they will have to raise their rates.

The expert was Helen Christopher, operations manager of contractor accountants Orange Genie.

Editor’s NoteThis is the fifth instalment of a seven-part Contractors’ Questions series based on questions posed in a recent webinar on Autumn Statement 2016 and its impact on contracting. Click to view the previous instalments -- part onepart twopart three and part four.

Monday 16th January 2017