New government proposals regarding which party determines the IR35 status of engagement in the public sector have been met with a swathe of negativity.

Under the proposed new rules, public sector organisations or employment agencies would determine the IR35 status of an engagement with a Personal Service Companies (PSCs), rather than the PSC itself.

Employment taxes would then be applied to businesses who are caught by the new rules, and this would be the responsibility of the organisation or agency.

The proposed changes have been widely lamented in the public sector.  Many feel the government intends to tax such businesses like employees, but without the rights or benefits of full employment.

And the ramifications within the public sector could be substantial, as evidenced in a finding from a recent survey by the Association of Independent Professionals and the Self Employed (IPSE).

More than half (54%) of Personal Service Companies (PSCs) claimed they would leave the public sector if the proposed rule changes were put in place.

Just 2% said they would continue to take public sector contracts if the new proposals were implemented, and 81% said they would seek work outside the public sector as an alternative.

31% of the survey’s respondents said they would no longer work on public sector contracts at all if the proposal is introduced. This was even before finding out whether they would have to pay the same tax and National Insurance as a full employee.

23% indicated they would terminate their public sector contracts if they had to pay tax like an employee.

The proposed changes come despite the fact that approximately 26,000 PSCs worked in the public sector in 2015, contributing £3.5 billion to the national economy that year.

If the proposals are pushed through, the likely outcome would be for PSCs to be forced to increase their day rate to cover the tax liability factor. This means public sector organisations would likely be forced to splash out more for their services, thus increasing costs, with no benefit to speak of for the exchequer.

Commenting on the new proposals, IPSE’s chief executive Chris Bryce said: "Public services will ultimately suffer most from this proposal. Public sector bodies, seeking to salvage and maintain large-scale projects, would have to find alternative resources – or hire PSCs at an increased rate – leading to a significant cost to the taxpayer.”

Bryce also expressed concern as to whether, going forward, the proposal may be applied to other sectors. If the rules were to be applied to the private sector, for example, he described the potential ramifications as ‘beyond disastrous’.

“We strongly urge the Government to abandon this proposed change,” he added. “While IPSE fully agrees that all taxpayers should pay the right amount, we believe the Government is going about it in completely the wrong way. The damage this will have on public services and the flexible economy is too great to ignore. It is a potentially disastrous step, it is unfair and will be challenged. The immorality of taxing them as employees while denying employment rights beggars belief.”