Four-fifths of IT projects delayed as public sector haemorrhages tech talent due to IR35 tax avoidance reforms

IR35 clampdown persuades one-quarter of IT contractors to leave public sector in just four months

Reforms to the IR35 tax avoidance regulations have led to a haemorrhaging of technology staff from public sector projects, with more than three-quarters of government departments losing IT contractors working on public-sector IT projects and 79 per cent of those projects being delayed or cancelled as a result.

The claims have been made by contractor website ContractorCalculator and come four months after the regulations were tightened, with the intention of clamping down on people who are effectively employed full-time, but paid as contractors in order to avoid tax.

It comes just two months after the government was warned that an exodus was already underway, with many contractors also not trusting public sector groups to make the correct deductions even under the reformed IR35 regulations.

According to the latest ContractorCalculator survey, one-quarter of contractors in the public sector have left and almost half of IT projects have lost at least one-quarter of their contractors. In addition, more than half the contractors who have left public sector work have yet to be replaced.

Furthermore, half of contractors say they won't work in the public sector again if caught by IR35, or only if the extra tax they have to pay is met with higher rates.

Dave Chaplin, CEO and founder of ContractorCalculator, suggested that the survey ought to provide a "wake-up call" for government.

"HMRC was warned that this would happen and now we have the evidence that shows just how damaging the changes have been - diminished access to the flexible workforce has caused irreparable damage to multiple vital public services, projects have been cancelled and others are running over budget by millions of pounds," said Chaplin.

He continued: "What's more, we expect that HMRC is planning to roll out the reforms in the private sector which just goes to show how far removed from reality the taxman is. Action is needed to prevent further decimation of our public sector services and stop a private sector roll out which will cause further chaos for contractors, businesses and the UK economy overall."

The survey also indicates that IT projects are being delayed because the supply of IT contractors have dried up and, as contractors leave, suitably qualified replacements have become increasingly hard to find.

"HMRC has chosen to shoot the public sector's IT capability in both feet by sparking a contractor exodus. IT contractors are in very high demand, could not be forced into false employment, so voted with their feet," added Chaplin.

The NHS has been particularly acutely hit, added Chaplin, with almost two-thirds of contractors considering a career change and two in five suggesting that they may quit contracting altogether - and in the NHS, the problem stretches beyond the IT sector.

"Due to the pay caps in place in the NHS, many locum doctors and nurses can't charge increased rates to compensate for loss of earnings and few NHS departments are willing to offer outside IR35 contractors…

"Further anecdotal evidence tells us that operations are being cancelled, cancer waiting times are being extended and patients with mental health conditions are being left without support due to staff shortages," said Chaplin.

However, HMRC has rejected the results of the survey. "The survey is based on an unrepresentative sample. There is no evidence of a drift from the public sector and there have been no delays to IT projects due to the new rules. There is no change to contractor pay other than to make sure the correct tax is paid," claimed a HMRC spokesperson.

IR35 was launched in 2000 as an anti-avoidance measure, and was staunchly resisted by IT contractors. However, suggestions that IR35 should be abolished, made during the 2015 general election, would have cost HMRC an estimated £550m every year in foregone taxes, according to the taxman.