The new rules contained in draft legislation mean that where a recruitment agency is the ‘fee payer’ (ie. where it pays the PSC), it will be responsible for paying the tax and employer’s National Insurance contributions of 13.8% of PSC contractors it supplies into the public sector, where the PSC contractor falls within IR35 (ie. is not genuinely self-employed).

“They will be deemed to be the worker’s employer for tax and NICs purposes,” Adrian Marlowe, chairman of ARC (the Association of Recruitment Consultancies) told an audience of recruiters at a conference in London yesterday.

Under current rules the tax advantages of being self-employed mean that PSC contractors working in the public sector can be significantly better off than employed workers, even when they are both doing exactly the same job in the same organisation.

Colin Morley, professional services director at professional recruiter Harvey Nash, a panellist at the event, predicted that contractors would move out of the public sector, citing the Ministry of Defence and the NHS as likely examples. IT departments across the public sector who are heavily reliant on self-employed contractors would be particularly badly hit, he said.

A medical recruiter, who attended the conference but wished to remain anonymous, said nurses in the NHS, many of whom are engaged through their own PSCs, would be badly affected.

Speaking at the conference, Theresa Mimnagh, associate director at legal consultancy Lawspeed, said she expected some PSC contractors currently working in the public sector would switch to the private sector, where the new rules will not apply.

Morley said that some public sector bodies were already taking away the PSC contractor option for workers. “The Bank of England had said that contractors will have to be paid net [of tax and NICs],” he said. Mike Innes, regional director at engineering recruiter TRS Staffing, and a fellow panel member, said Transport for London was already insisting that all workers were put on the payroll.

Morley said it was the company’s 500 existing PSC contractors working in the public sector, who would see a reduction in their take-home pay “who we are worried about”.

Kieran Rossiter, chief finance officer at professional recruiter Morgan McKinley, and also a panel member, said in anticipation of the new rules he was already seeing PSC contractors switching to working through umbrella companies.

The government is bringing in the changes to IR35 as part of its anti-tax avoidance stance, having identified the public sector as an area where abuse was taking place, with organisations such as the BBC engaging PSC contractors, in some cases for years at a time.

The government says it expects the exchequer to bring in an extra £450m a year as a result of the changes. The government has refused to say whether it intends to introduce the new rules into the private sector.