Blanket IR35 Bans on Contractors by Banks is Complete Madness

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Blanket IR35 Bans on Contractors
Blanket IR35 Bans on Contractors

Blanket IR35 Bans on Contractors

A number of major UK banks have announced blanket IR35 bans on contractors over the last few weeks. The latest is Barclays Bank who announced theirs just this week. This will mean that the banks who continue to take contractors using Personal Service Companies will have a massive commercial advantage on those who don’t. All contractors at Barclays in the future will be PAYE contractors. That’s even if the contractors can prove that they are outside IR35.

Contractors Questions on Blanket IR35 Bans on Contractors

  • Which banks are operating blanket IR35 bans on contractors?
  • Why are banks operating blanket IR35 bans on contractors?
  • Why don’t the banks use HMRC’s Check Employment Status for Tax online IR35 test?
  • Have the big consultancies had a hand in this?
  • What will be the result of the blanket bans?
  • How much will the banks blanket bans cost contractors?
  • Is there much difference in the productivity of contractors?
  • What ill be the Effect on Projects run by Blanket IR35 ban banks?
  • What will be the cost to banks operating blanket bans on contractors?

Which Banks are Operating Blanket IR35 Bans on Contractors

The latest bank to announce that they will only take PAYE contractors in the future is Barclays Bank. They announced this week that they will no longer hire any more contractors from October 1st onward except for PAYE contractors. Indeed they will not renew the contracts of their current freelancers after October 1st. This was announced on September 30th. They sent an email to all their contractors telling them this.

Other major UK banks who have stated that they will have blanket IR35 bans on contractors include HSBC and Morgan Stanley. RBS have not announced officially yet but they are thought to be going to continue to take on both contractors inside IR35 and contractors outside IR35.

We know of a major UK building society who are going to continue to take on Personal Service Company contractors. We have it on good authority. However, as they have not finalised this, and haven’t announced it, we cannot say who it is yet.

Why are Banks Operating Blanket IR35 Bans on Contractors

In 2017 the Government changed the IR35 rules in the public sector. In April 2020 they will implement those new IR35 reforms in the private sector too. The basic differences is in who is now responsible for deciding a contractor’s IR35 status. From 1999 until now, in the private sector, it was always the contractors themselves. They self declared.

The Government is changing this. It will now be the hiring company, in this case the major UK banks, who will decide on a contractor’s IR35 status. Previously, if they got it wrong the contractor would have to pay back tax, interest and penalties. Now it is the hiring company who may have to pay.

This is what is causing the more timid UK banks to issue blanket IR35 bans on contractors.

However, there is no need for this extreme timidity.

Why Don’t the Banks Use HMRC’s Check Employment Status for Tax Online IR35 Test

HMRC said that if hiring companies use their Check Employment Status for Tax online IR35 test to test contractors and the contractor is outside IR35, HMRC will not pursue the company for the contractor’s back tax, interest and penalties even if the contractor is later shown to be inside IR35.

There are many who criticize HMRC’s CEST test. It was created by HMRC and many say it is biased towards HMRC. However, HMRC have made that promise.

Many public sector companies made their contractors sit this test to determine their IR35 status. If they passed it everything was fine. They could continue to use their Personal Service Companies. If they failed it, or got an Indeterminable result, then they would have to pay the IR35 tax. Many of those failing joined umbrella companies.

However, even this assurance wasn’t good enough, or safe enough, for the more timid banks. So, they are not going to take on any more contractors. Any temporary workers they hire must be permanent employees of someone else.

Have the Big Consultancies Had a Hand in This

No doubt the big consultancies, who have always seen contractors as rivals, will be telling the banks to be ultra-cautious. This was what happened in the public sector. They told pubic sector organizations that, if the CEST software tool changed then they might find that the contractors who passed the test were suddenly inside IR35. This was compete nonsense as HMRC had guaranteed that anyone passing the test would not be pursued by HMRC even if they were subsequently shown to be inside IR35.

This was a highly unlikely scenario anyway with the CEST test so biased in favour of HMRC who created it.

What Will be the Result of the Blanket Bans

The result of the blanket bans operated by the banks will be twofold:-

  1. The banks not operating the blanket ban will get all the best contractors
  2. The contractors that the blanket ban banks hire will gradually become more expensive for them.

Both of the above will have major impacts on the bottom of line of these banks. Indeed, canny punters might be tempted to short them.

How Much Will the Banks Blanket Bans Cost Contractors

As regards the former, let’s take the case of a bank contractor earning £750 a day after the agency cut. If the contractor is working for a bank who take Personal Service Company contractors, the contractor might be able to keep around 80%, or £700, a day. If he, or she, has to pay PAYE then they will only be able to keep around 60% or £450 a day. That’s a difference of £750 a week or £37,500 a year.

That’s a massive amount of money. So, which companies will contractors want to contract with?

The result will be that the companies using Personal Service Company contractors will get most of the best contractors. Why would the contractors want to work for an organization which will pay them effectively £37,500 a year less?

Those banks using PSC contractors will get their choice of them. Those contractors who can’t get contracts with those companies will have to bite the bullet and take a contract with one of the timid banks.

Will this make much difference to the various banks?

How Much Difference Is There in the Productivity of Contractors

Well Tom De Marco, the software quality guru, used to run weekend war games for programmers. They were given programmes to write. He split these into 4 quadrants depending on how they performed as programmers. One of the major lessons that he discovered was that those programmers in Quadrant 1 were 10 times as productive as those in the bottom Quadrant 4.

Yes, that’s right – 10 times as productive. Yet there are not massive differences in contractor rates. Companies tend to think of contractors as bums on seats. They don’t appear to realise the massive difference in productivity between the good ones and the bad ones. They won’t notice the difference when their IR35 policies go into practice.

What Will Be the Effect on Projects Run By Blanket IR35 Ban Banks

However, their projects will take longer, they won’t do what their users originally wanted and they will have a far higher rate of errors.

Many companies say that their computer systems ARE their business. Nowhere is this more true than with the banks.

And Barclays and other banks have just taken a decision which will mean that they will build future systems using contractors who may be up to ten times less productive than those used by many of their rival banks.

What Will the Cost Be to Banks Operating Blanket IR35 Bans on Contractors

Of course, something will have to give here. They cannot continue to effectively pay £37,500 a year less to their contractors when they are actually paying the same rate to them.

To compensate they will have to pay more than their rival banks who use PSCs in order to get decent contractors.

Both of the above scenarios will have a major result on their bottom lines. It is survival of the fittest in business and their rival banks who take PSC contractors will have a massive advantage in both cost and productivity?

Anyone know how to take a short position on shares?

The original article is here – Barclays IR35 Contractor News Breaking – Bank to Dump All Freelancers

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