Rachel Reeves, the chancellor of the exchequer, is under pressure to investigate the increase in public sector spending due to the April 2017 IR35 reforms. The goal is to address the £22 billion deficit in the public finances left by the previous government.
During a speech to the House of Commons on July 29, 2024, Reeves disclosed the projected overspend from the previous government’s actions and outlined plans to reduce the financial pressure by £5.5 billion this year and over £8 billion next year. One area she is targeting for savings is non-essential government spending, particularly on consultancy costs.
The decision to limit the reliance on external consultants is seen as a positive step by Dave Chaplin, CEO of IR35Shield. He suggests that Reeves should start by reviewing the impact of the 2017 IR35 reforms on government spending.
The reforms shifted responsibility for determining tax status from contractors to the public sector end-hirers, leading to increased administrative burdens. Some departments imposed hiring bans on limited company and PSC contractors, while others made blanket assessments, classifying all contractors as inside IR35.
This approach has resulted in a rise in day rates for inside IR35 contractors, as they seek to offset increased tax liabilities. Furthermore, engaging contractors through umbrella companies adds additional costs to the supply chain.
Reeves is urged to reverse the government’s hesitancy to engage contractors outside IR35 and focus on reducing hiring costs, starting with IR35 compliance. Departments like HMRC and the Department for Transport have seen a significant increase in umbrella company contractors, leading to higher costs.
Chamberlain of IPSE emphasizes the importance of contractors and consultants in providing essential skills to government departments. Instead of cutting their numbers, efforts should be made to reduce costs by addressing IR35 compliance issues.
IR35 compliance failures have led to unpaid tax demands against departments like the Home Office and DWP. The enforcement actions taken by HMRC have resulted in additional costs to departments, undermining the purpose of the legislation.