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Tech contractors begin mass exodus in wake of HMRC's IR35 income tax clampdown

IT transformation and Brexit could mean a perfect storm for gov tech

Public sector contractors in the UK are starting to down tools across a range of projects ahead of the new tax regime in April, leaving numerous projects hanging in the balance.

Multiple sources have been in touch with The Register to report that professionals are leaving in droves rather than face the IR35 tax changes. From April the responsibility for compliance with the intermediaries legislation will be the responsibility of the public body or recruitment agency.

HMRC hopes to recoup £440m by bringing 20,000 contractors within the remit of the legislation. The tax bods believe just 10 per cent of these guns-for-hire who should apply the rules do so.

IT contractors make up a significant chunk of those to be brought into the IR35 fold. Central government currently has 18,000 digital contractors on its books, according to a leaked document of the Government's Digital Strategy.

One source reported that half of 87 contractors working on a defence-related IT project have already left.

Another reported that out of his team of security consultants, two-thirds have already moved to the private sector. “When you think that many of us have decades of experience, that amounts to a huge loss of organisational knowledge.”

According to site, ContractorUK, 30 PSC contractors will abandon an overrun £16.5m health service IT project after a NHS trust said it would declare them all inside IR35 from April 6.

Sources have also said that the loss of contractors could affect NHS trusts still in the process of migrating from Windows XP.

Contractors have been leaving en masse for some time - with more expected to leave the public sector when their contracts expire at the end of March.

Last year the Ministry of Defence lost 30 out of 32 contractors, who had baulked at the MoD’s approach to enforcing IR35 guidelines.

An exodus of IT contractors does not bode well for the sector, which faces huge challenges in transforming its decades-old technology, and will be faced with further complications as systems will need to be de-coupled from European legislation in light of Brexit.

Gov IT is also in a parlous state, with one-third of government projects having been flagged as at high risk of failure in the next five years according to the National Audit Office.

One source reported that many larger companies such as IBM, Accenture and Capita, are already putting themselves forward to scoop up the body-shopping work left by the contractor exodus. “How on Earth does that fit with the agenda to work with more SMEs?” said one contractor.

Dave Chaplin, chief exec of freelancers website Contractor Calculator, said the reason many are leaving is due to the “fear and uncertainty” around applying the changes. Even if contractors hike up their rates, as some departments have been advising they do, there is still a concern that HMRC will knock on their doors for back taxes.

A survey by the site found that 90 per cent of UK government IT contractors will rebel against proposals by HMRC to clamp down on self-employed workers not paying the correct employment taxes.

The government has responded to a petition doing the rounds calling to scrap the IR35 changes. It said it recognises concerns that determining whether or not the rules apply can be administratively demanding. "In response to this, HMRC are developing an online tool that will help public sector bodies to determine whether or not the rules apply.”

However, the live date for that tool won’t be until March, by which time many contractors are expected to have left the public sector. ®

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