Contracting is something of an umbrella term. Referring to a wide range of work available to self-employed freelancers and, of course, contractors. It includes pretty much anything you can think of, with many different categories for the prospective contractor to consider. One important consideration is the public sector vs. private sector.
This particular category is important for contractors to be knowledgeable of. It essentially refers to the controller of businesses and organisations that fall within each sector. For the private sector, organisations will be owned and operated by private individuals. Whereas the public sector is operated by the government. To be able to work well in either sector, contractors will need to have a firm grasp on the differences between the two.
For Umbrella Options’ breakdown of the public sector, private sector, and what differentiates the two, read on.
The public sector is the side of the economy that is directly controlled by the government. It includes the levels of government itself, in addition to government-owned organisations and companies.
As companies in this sector receive their funding from the government, they must adhere to a larger set of rules and regulations than the private sector. The additional legal requirements do not only come from local governments, but from international bodies as well. Rules and regulations implemented into European Union law can affect the public sector. As can regulations from the World Trade Organisation. These regulations can range from increased transparency, to environmental considerations, and anything in between. Contractors accustomed to working within the private sector should be aware of the increased responsibilities placed on the public sector, as they may impact how work is done.
In addition to increased legal responsibilities, the public sector faces more scrutiny and has more goals to achieve. For example, as public sector organisations receive their funding from the government and therefore from taxes, there are many more people that have a stake in what the organisation is doing and how well it does it. Although private sector companies often have investors and stakeholders, it is incredibly rarely comparable to the public sector. Due to this higher level of scrutiny, public sector organisations must be more mindful of “social value”, which essentially refers to how the actions of the organisations affect the wider community.
Given that public sector organisations receive their funding from taxes, maintaining a positive public opinion is crucial for success. One of the main factors in this regard is transparency. As these organisations are government-operated, it is expected that details of what they are doing are readily available to the public. This is due to both legal requirements and public opinion. Examples of required details include equal opportunity employment, equal pay, expenses, and so on.
Contrary to the public sector, organisations within the private sector are directly owned and operated by private individuals, rather than the government. Because of this, they are subject to fewer rules and generally less scrutiny.
Unlike the varied goals of the public sector, private sector organisations are driven by making sales and generating profit. This means that other considerations, such as social value, are often secondary. This may grant contractors more freedom with how they work on a contract within this sector.
Private sector organisations are not expected to be as transparent as public sector ones. Although there exists the legal requirement to provide some level of transparency, it is not nearly as strict as in the public sector. Additionally, as public opinion is not as important to the private sector, there is less pressure to be transparent to create a positive image.
IR35 regulations used to be a factor worth considering when deciding which sector to work in. As of April 2021, however, changes to this regulation have made the private and public sectors very similar.
IR35, often referred to as off-payroll legislation, was initially introduced in 1999, then formally implemented into UK law in 2000. It was designed to stop people from disguising their employment status. As that would allow them to benefit from unearned tax advantages. For example, if a contractor were to resign from a company, only to return later the same week to do the same work, but now as a self-employed contractor, this would be seen as disguised employment, and now a violation of IR35 legislation.
At first there were distinct differences between the two sectors. Recent changes to IR35 legislation have now made them very similar. The public sector still functions in the same way as before the changes. Your client will be responsible for determining your IR35 status. If you are found to be working within IR35, your client will be required to deduct tax and National Insurance from your pay before you receive it, or ask you for evidence that you pay your tax in accordance with IR35 legislation. If you intend to work within the public sector, it is a good idea to keep documents like payslips at the ready, in case you need to provide evidence.
The main impact of the changes to IR35 legislation is felt by the private sector. Before the changes, it was your responsibility as a contractor to determine your status under IR35 and be able to provide evidence if needed. Now, much like the public sector, this responsibility has shifted to your client. Due to this, it is expected that private contractors can see their take-home pay reduced by up to £7,500 if they are found to be working within IR35. If you believe your client has wrongfully categorised you as working within IR35, you will have the option to dispute this decision using the new “client-led status disagreement process”.
According to the Companies Act, small companies will be exempt from these changes, in order to reduce their administrative burden. This exemption will apply to your company if at least two of the following criteria apply within a twelve-month period:
Legislation changes are a hassle at the best of times, even more so when you run a business. If you would prefer to do without the headache of adapting to these changes, consider using an umbrella company as an alternative. Payroll, taxes, and other administration will be handled for you. Worrying about IR35 will be a thing of the past. To find out what an umbrella company could do for you, check out our umbrella calculator. It’s simple to use and will give you a take home breakdown instantly.