Banking & Finance IR35 Verdict – End of Contracting for Bank Contractors

Banking & Finance IR35 Verdict
Banking & Finance IR35 Verdict - It's the end of contracting

Banking & Finance IR35 Verdict

It looks like the banking & finance sector IR35 verdict is going to be awful for UK contractors and freelancers. Three banks and one finance company have now said that they will take on no more contractors from late this year. No banks or finance companies have yet come out to say they will still take Limited Company contractors. However, all the others will be assessing their options at the moment. But t doesn’t look good for UK contractors in the banking sector.

Questions from the Banking & Finance IR35 Verdict

  • What are the IR35 Changes?
  • Why were the IR35 changes put in place
  • When will the IR35 changes happen after the Banking & Finance IR35 Verdict?
  • Which banks and finance companies have declared?
  • What will banks and finance companies do about the changes?
  • What will other companies do about the IR35 changes?
  • How much will the banking & finance IR35 verdict cost contractors
  • What happened when the IR35 changes were put into the public sector?
  • What will contractors do when the changes are implemented?

What are the IR35 changes

The main change is that it will be the person or company hiring contractors who will decide a contractor’s IR35 status. Previously the contractor decided for himself or herself their status. If they got it wrong they would be due to pay a lot of back tax, penalties and interest.

However, HMRC have a very poor record when the accuse contractors of operating outside IR35 when they are really inside. They lose the majority of the cases they pursue against contractors. That’s despite them being able to choose out of all the UK’s contractors, which ones would be most likely to be inside IR35.

Check Employment Status for Tax IR35 Test

Despite this apparent poor knowledge of IR35, HMRC have created a Check Employment Status for Tax (CEST) online IR35 test. They have told hiring companies that they will not chase them for money for contractors who pass this test.

The hiring companies are told that if they get it wrong they may have to pay the back tax, penalties and interest themselves. Companies are being told by the big consultancies not to take the risk. They are telling them to no longer hire Limited Company contractors. And the big banks & finance IR35 verdict is that they will follow that advice.

Why Were the IR35 Changes Put in Place

Prime Minister David Cameron, and Chancellor Osborne were originally responsible for putting the IR35 changes in the public sector in April 2017. Theresa May and Philip Hammond didn’t demur from this when they took over.

The Conservatives told contractors groups, like IPSE, that they were going to abolish IR35 if they got elected in 2010. However, their written down offer just said that they would look at IR35 again. They did, decided to keep it – and said they would STRENGTHEN IR35.

IR35 Changes in Private Sector

Prime Minister Theresa May and Philip Hammond decided to roll the IR35 changes out to the private sector too. May and Hammond both said that “it is an anomaly that self employed people earning 100 thousand a year pay less tax than permanent employees earning 100,000 a year” She intended to fix that anomaly. So, she decided to roll the changes out in the private sector as well.

Of course we all know it is not comparing like with like. The permanent employee gets a lot more benefits than freelancers with a lot less of the risk.

When will the IR35 Changes Happen After the Banking & Finance Verdict?

The new IR35 rules for the private sector will happen in April 2020. However, the banking & finance IR35 verdict is that they will implement the changes sooner. They are saying that they will take no more contractors on from various dates later this year.

Which Banks and Finance Companies have Declared?

  • HSBC
  • Morgan Stanley
  • Lloyds (not publicly yet)
  • M&G Investments (Finance)

HSBC said they will take no more contractors on from September. Morgan Stanley said they will take no more contractors on from October. They have also told their current contractors that they must become staff in 22 months.

What Will Banks and Finance Companies Do About the Changes?

Of the four bank sand finance companies to declare so far, all four have said that they will stop taking contractors from late this year. The big banks tend to copy each other. There is a domino effect. In the downturn once one bank cut contractors’ rates across the board by 10%, the others followed suit. It is most likely that the other banks will do the same with the IR35 changes. Expect more announcements.

What Will Other Companies Do About the IR35 changes?

Other companies are currently working out what they will do about the changes. They are probably being advised by the same big consultancies as the banks. The big consultancies have always seen contractors as rivals who can take a lot of what they see as their business and who can seriously undercut them.

A recent survey by Brookson Legal showed that 59% of companies are considering a blanket ban on limited company contractors. So, you can expect many companies to follow the banks in getting rid of all their contractors.

How Much Will the Banking & Finance Verdict Cost Contractors

How much it will cost contractors depends on how much they earn. It has been stated that it could cost contractors up to 40% of their income. However, most contractors will probably lose about 25%. It also depends on which option contractors take. It will be very expensive if they take the ‘going permanent’ option. Again, paying the IR35 tax will be expensive.

Their best option would be an umbrella company. That’s the route most contractors in the public sector took.

What Happened When the IR35 Changes Were Put Into the Public Sector?

When they implemented the IR35 changes in the public sector most contractors who were inside IR35 chose the umbrella company route. Some public sector organisations like the MoD, NHS and HMRC went for blanket bans on limited company contractors although this softened a little later.

What Will Contractors Do When he Changes Are Implemented?

What most contractors in the public sector did was join umbrella companies. Indeed there was a feeding frenzy for umbrella companies in early 2017. They preferred this to:-

  • leaving the company
  • paying tax like an employee
  • taking a permanent job with the company

Contractors to Use Umbrella Companies

The banks have already said that they would be happy to take the contractors back on via a 3rd party, i.e. an umbrella company. That way they would be passing the risk on to those 3rd party companies.

It looks as if umbrella companies are the future for the freelance industry in the UK. The Government won’t be happy till all contractors are paying the same tax as permanent employees. That would completely fix their ‘anomaly’.

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When the IR35 changes were implemented in the public sector, rather than just pay the IR35 tax, most contractors inside IR35 decided to take the umbrella company route.

If you are inside IR35, or caught by a blanket ban on Limited Company contractors, it would be worthwhile checking to see how much income you would keep using an umbrella company. Just fill out the form below and someone will be in touch to let you know.

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    1. How would going through an umbrella company be better than PAYE?

      Assuming a salary of £100K, a PAYE would take home about £68K.

      Going through an umbrella company, you pay the same amount in tax, PLUS an additional fee to the umbrella company.

      So why not just go PAYE?


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