Public sector bodies such as the NHS, government departments and educational establishments face a massive upheaval next year and significant extra costs because of tax changes, regional accountancy firm Bishop Fleming is warning.
From April 6, public bodies will be forced to judge whether any third-party contractors they engage are caught within controversial rules, designed to detect disguised employment. 
At present, individuals and experts providing freelance services to the government through their own companies can decide for themselves whether the rules apply.
But under new rules included in the draft Finance Bill they will lose their say and will not have any choice as to their employment status.
Andrew Browne, pictured, head of tax at Bishop Fleming, which has a large office in Bath, said that public bodies were being saddled with a task for which they have no prior technical knowledge or expertise.
The complex IR35 rules concerned employment status that had evolved under case law over the past 100 years, he said. This was borne out by the lengthy guidance notes that have been issued by the government.
HM Revenue & Customs is working on an automated tool to assist with the task, though Mr Browne is sceptical that it will be ready by April. He also fears it will be too biased in favour of employment and not a sufficiently comprehensive substitute for proper legal opinion.
“Public bodies (and agencies) will be very tempted to ‘play it safe’ and deduct PAYE and National Insurance Contributions (NIC) in most circumstances, meaning many contractors will be unfairly taxed,” he said.
“This will push up the wage bills of public bodies, as they will have to pay employers’ NICs on contractor payments, unless they can get away with paying the contractors less money.”
He also said he expected an exodus of many thousands of contractors from the public sector next year as a result of the changes, taking with them considerable specialist knowledge that will be hard to find among the employees of public bodies.
“Contractors will look for work in the private sector where they can judge the matter for themselves, and so not have PAYE and NIC deducted where it is not due,” he said.
Even where IR35 is deemed to apply, indicating that a contractor is an employee of the client, the individual will not receive any employment rights from the client – a set of circumstances Mr Browne describes as bizarre.
He also said he expects these changes to be a pilot by the government for introducing more draconian rules in future for the private sector – taking away the rights of contractors to run their own businesses in the process.
The new rules will even act retrospectively in that any payments made to contractors on or after April 6 next year will be subject to the new regime, even though the work had been carried out by the contractor before this date.
He argued that the government would be much better to await the outcome of its own review of the wider issues at stake, rather than rushing through an administratively costly change in a very short timescale.
“The new rules will be a burden on the public sector and will send an anti-business message to the business community,” he said.
Bishop Fleming’s Bath office is one of seven across the South West and Midlands.
