Over half of Personal Service Companies (PSCs) working in the public sector say they would leave the sector if the government goes ahead with changes to the way they are taxed, according to new research.

The survey from IPSE, the Association of Independent Professionals and the Self Employed, found that 54% of PSCs working in public sector organisations would want to leave if the new ‘unfair’ tax regulations are implemented.

The Government intends to make public sector organisations, or the agency, determine the IR35 status of an engagement, as opposed to the contractor’s company. The client or agency will then be responsible for applying employment taxes to those businesses that are deemed to be ‘caught’ by the new rules.

IPSE said that the proposals “blur the boundary” between employment rights and tax status because the government want to tax businesses like employees, but not give them employment rights.

Abandoning the public sector

The survey by IPSE found nearly a third (31%) of respondents indicated that they would no longer work on public sector contracts at all if the proposal is introduced, even without waiting to find out whether they will be required to pay the same tax and National Insurance as an employee.

Almost a quarter (23%) said that if they have to pay tax like an employee, they would terminate their public sector contracts and only two per cent would continue taking on public sector contracts if the proposal is implemented.

Out of those who indicated they would terminate their public sector contract or not work on public sector contracts at all, four in five (81%) would seek out work outside the public sector instead.

Chris Bryce, IPSE chief executive, said: “This proposal will damage not only the affected 26,000 Personal Service Companies (PSCs) working in the public sector, which contribute £3.5 billion to the economy, but their clients and agencies too.

“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 significant cost to the taxpayer.”

Forced to increase rates

Almost four in ten (39%) indicated that they would have no choice but to increase their day rate to compensate for any additional tax liability.

The IPSE said the proposals mean public sector bodies would have to pay more for their services, which would again increase the cost and strain on public funds, with no benefit to the exchequer.

Mr. Bryce added: “While IPSE fully agrees that all tax payers 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”.