Its survey of some 500 contractors found that 80% said they will seek an alternative contract if the public sector contract is advertised as being caught by IR35.

Only one in ten contractors (11.34%) say they will stay working in the public sector under the new rules on their current rates.

Dave Chaplin, CEO and founder of ContractorCalculator, said: ‘HMRC’s naïve conviction that contractors are going to roll over and accept these new conditions is going to have disastrous unintended consequences.  Four out of five respondents said they would turn down an inside-IR35 role and seek opportunities elsewhere because a typical contractor would have to increase his or her fees by 30% to earn the same income if deemed to be inside IR35.

‘HMRC’s proposed reforms hang on the premise that contractors will readily accept having the same amount of tax deducted as employees, without receiving any employment benefits such as sick and holiday pay.’

At Budget 2016, the Chancellor announced that from April 2017, where workers are engaged through their own limited company or personal service company (PSC), responsibility to apply the intermediaries rules will fall to the public sector body, agency or other third party paying the worker’s company, who will become liable to pay any associated income tax and National Insurance contributions (NICs).

At the time, the government said estimates suggested only one in ten PSCs who should be operating the rules on at least part of their income are doing so, and put the cost to the Exchequer at £440m in tax year 2016 to 2017, taking into account the changes to the taxation of dividends from April 2016.

However, Chaplin disputes these figures, pointing out that most (89%) of contractors in the survey said they earn either the same or more than they would do in permanent employment. Overall, the expected combined total salaries of all respondents if placed in permanent roles amounted to £31.7m, compared to £50.3m in combined gross fees as contractors which equates to a 58% increase in taxable income earned via contracting.

ContractorCalculator totted up the combined taxes due on the £50.3m contracting earnings of its survey respondents, arriving at £16.8m. Moving these contractors into permanent employment on lower salaries would result in a tax yield of £13.9m for HMRC from the £31.7m combined earnings – a 17% reduction of £2.9m.

If this sample size is extrapolated to the 20,000 workers that HMRC claims will be affected, the total tax loss to the Treasury will be £115m, contrary to the £400m HMRC claims it will raise with this measure, ContractorCalculator says.

In addition, Chaplin argues that if this trend is consistent across the public sector contracting workforce, the consequences for HMRC become far more severe and could cost the government £610m more each year to hire the same people. The survey results indicate that only one in ten contractors (11.34%) say they will stay working in the public sector under the new rules on their current rates.

Chaplin said: ‘The reforms are quite simply unworkable and will lead to an exodus of talent that will have a significant impact on an already stretched public sector.  We know from a National Audit Office report out earlier in the year that government projects rely heavily on contractor expertise.  The whole point of hiring contractors via personal service companies (PSCs) is the public sector wants contractors, not employees, for short-term expertise on tap.’

HMRC’s consultation, Off-payroll working in the public sector: reform of the intermediaries legislation, closes on 18 August. Details are here.

The ContractorCalculator survey is here.