Government is considering bringing earlier IR35 tax reforms to private sector, at contractors' expense

The changes, intended to catch tax dodgers, have led to a massive staff shortages in the public sector

Less than a year after the disastrous changes to IR35 public sector tax avoidance regulations, Chancellor Philip Hammond may turn his attention to the private sector in the Autumn Budget next week, according to Treasury leaks.

The earlier IR35 adjustments were intended to crack down on ‘disguised employees': people operating as full-time workers but paid as freelanceers to avoid National Insurance tax. However, the changes have damaged the public sector, with around 25 per cent of contractors having left in favour of private work. IT projects are also being delayed by lack of staff.

Julia Kermode, head of the Freelancer and Contractor Services Association, said, "It has been shambolic. We've seen skills shortages in public bodies because they have lost such huge numbers of contract workers."

The rumoured private sector changes are aimed at equalising tax paid by full-time and freelance workers - but without handing the latter any of the benefits enjoyed by the former, such as holiday pay, sick leave or an pension contributions from an employer.

They would also provide a (short-term) cash boost to the government, which needs money to fund public sector pay rises and increase spending on services like the NHS. The stagnant state of Britain's post-Brexit economy provides little extra funding for such payments.

Sources say that the Treasury's move would specifically target IT contractors, consultants and others paid through ‘personal service companies'. HMRC does not believe that most freelancers calculate their tax and National Insurance correctly, and the changes would mean that the onus is on the employer to ensure that workers do not dodge tax.

HMRC expects to raise around £265 million from the change. The earlier public sector adjustments were also intended to raise tax revenue, but the outcome has seen the public sector paying out extra money as it takes on former contractors as full-time staff. The Treasury says that public bodies had taken on 90,000 new employees between April and June, most former freelancers.

Lee Murphy, an accountant and founder of cloud accountancy software developer Pandle, said, "Short term tax and VAT raids on Britain's 2 million freelancers and 3.3 million other micro businesses will hurt the economy badly by damaging this most dynamic sector, while costing employers dearly in additional costs and skill shortages."

He added, "The taxman is paranoid that lots of freelancers are really ‘disguised employees' who work full time for one employer on an indefinite basis. There is a bit of that, but tackling it by hitting 2 million innocent people with massive cost and bureaucracy, not to mention additional costs being passed onto the organisations that use them, will damage this essential part of Britain's economic success."