Just as there are different types of contractors, from those work through a limited company to those who chose to operate via an umbrella company, there are also different types of work available to contractors. Namely, the biggest difference lies between public sector and private sector contracts.

Whereas the public sector lies under the control of the government, the private sector is run by individuals or businesses who make a profit. As well as who controls each sector, there are further key differences between the public vs private sectors that impact contractors, including spending, goals and transparency.

In this guide, Umbrella Broker explain what these key differences are, including how contractors are impacted by IR35 in both the public and private sector, to help every contractor make an informed decision about which types of contracts they will work on and how.

The difference between the public and private sector

As well as who they are controlled by, the main differences between the public and private sector includes:

• Motivations and objectives: as public sector organisations have direct ties to the government, it is usually the case that their motivations and objectives are driven by compulsory regulations – whether that’s from local, regional or national government or sometimes other bodies like the World Trade Organisation. On the other hand, private sector organisations aren’t subjected to funding or regulations from government bodies, meaning they often have more freedom in how they operate. Free to set their own goals and targets, this usually means the private sector is financially driven, aiming for increased revenue and profit-making.
• Spending: the public sector is generally held accountable by several parties interested in how the sector is spending its money and how well they are performing. On the other hand, private sector companies usually don’t face this level of accountability. Although from time to time there will be investors and stakeholders who want to know how the company is performing, they don’t face the level of accountability public sector organisations do.
• Transparency: being controlled by the government, transparency is understandably of strong importance for public sector organisations. Key information on what public sector organisations are doing and achieving need to be available to any member of the public that wishes to access it. On the other hand, transparency in the private sector is not required to meet such strict standards. Being private organisations, they often have the option to hold back certain information if they wish.

Public Sector vs Private Sector: impact on contractors

Those are the main differences between public and private sectors, but what exactly does this mean for contractors?

The main difference between the public and private sectors for contractors involves IR35 legislation, although this is set to change.

Although IR35 did not originally apply to the private sector, in April 2021 big changes are set to roll out that will impact thousands of contracts working in the private sector.

Next, we’ll take a look at IR35 in the context of both the public and private sectors so contractors can weigh up which contracts suit them best.

IR35 in the public sector

IR35 came into practice in 2000 to prevent workers such as contractors operating as so called ‘disguised employees.’ In other words, it was put into place to stop workers from offering their services in a way that allowed them to avoid paying tax and National Insurance.

Originally, it was the responsibility of those providing their services to determine their own IR35 status. However, HMRC deemed that the system wasn’t working in 2015, stating that there were too many companies that were not complaint.

From 2017, changes rolled out to IR35 in the public sector meant that the responsibility of deeming a contractor’s IR35 status shifted to the client.

In practice, this meant that many contractors were determined to be inside of IR35, regardless of their actual circumstances. When a contractor is deemed to be inside of IR35, it becomes the responsibility of the client to deduct the contractor’s tax and National Insurance contributions from the contractor’s fee before they are paid.

The problem here lies in the fact that public sector bodies are not always accurate in their assessments, meaning that some contractors end up paying PAYE tax and National Insurance Contributions when they don’t need to.

IR35 in the private sector

From April 2021, private sector clients will now also be responsible for determining a contractor’s IR35 status. Although these changes were initially set to roll out in April 2020, due to the COVID-19 pandemic, changes have been delayed until April 2021.

This is set to badly impact the 170,000 self-employed contractors, with the potential to negatively effect these contractors’ pay. What’s more, it is predicated that many larger clients will simply stop using the services of limited company contractors altogether.

How to ensure you comply with IR35

To ensure you comply with IR35, you need to ensure the wording in your contract and the way you work need are representative of a self-employed, limited company contractor.

However, the less stressful option is to choose an umbrella company. Whether you decide to work within the public or private sector, by making the contractor their employee, an umbrella company takes IR35 out of the equation. That’s why umbrella companies are a widely popular option for contractors in both the private and public sectors.

Contracting under an umbrella company allows contractors the freedom and flexibility to choose what contractors they work, when, and whether that’s in the public or private sector. However, they also sort out a contractor’ tax and National Insurance Contributions, making you their employee and therefore exempt from IR35.