Abolish Contracting Profession
Chancellor Philip Hammond and Prime Minister Theresa May have finally gone and done it.
They have taken a second major step to abolish contract profession completely.
Chancellor Hammond announced in his November 2018 budget that what they call off-payroll workers will no longer be allowed to decide their own IR35 status.
The are rolling out the IR35 changes they made in the public sector in 2017 to the private sector too.
The one piece of good news for contractors and freelancers is that these changes will not be rolled out until April 2020.
It was expected that they would be rolled out in April 2019.
Massive Drop in Take Home Pay for Contractors
The Government has obviously taken the advice of many of those involved in the IR35 consultation not to hurry in this measure.
It is estimated that this change will mean a drop in take home income after tax of as much as 25% for freelancers and contractors.
One other piece of good new is that it will only apply to large and middle size businesses and not to small ones.
Small Business Definition
So what defines a small business?
So, while that is a piece of good news, I don’t think I ever freelanced for a company that satisfied those criteria.
So, what is behind this? What is the motivation for this attack on freelancers?
Unfair Tax Advantage for Contractors
The basic premise is, as Theresa May and Chancellor Hammond stated “It is unfair that a self employed person making £100,000 a year should pay less in tax than an employee earning £100,000 a year.”
The say that this is an anomaly.
As we all know, this is not comparing like with like.
However, the Government think it is and are going to destroy their flexible workforce to right what they see as a terrible injustice.
No doubt the big consultancies, who would stand to benefit if there are fewer contractors around, implanted this idea in their heads.
That’s just as they did with New Labour whom they convinced that there was a major IT skills shortage and that IT labour would have to be imported in vast quantities.
Abolish Contracting Profession – Umbrella Company Feeding Frenzy
What happened, in practice, in the public sector, was that, as most agencies don’t have payroll systems, most of the contractors inside IR35 went into umbrella companies.
Indeed there was an umbrella company feeding frenzy around March of 2017 for public sector contractors like locums, agency nurses and IT Contractors.
Some Government departments, e.g. the NHS and HMRC decide that they would no longer take limited company contractors – just to be on the safe side.
They forced contractors to dump their limited companies.
Took IR35 Test as Gospel
One agency said that 40% of their contractors failed HMRC’s new IR35 test called the Check Employment Status for Tax test (CEST).
Of course this test has no basis in law. The IR35 laws haven’t changed.
This is just HMRC’s perception of what IR35 is – and they are more than a little biased
However, Government departments took this test, and its results, as gospel when determining the status of contractors, locums, agency nurses etc.
Many locums and IT Contractors quit, causing major problems in the NHS and in the delivery of computer systems.
Rolling IR35 Changes Out to the Private Sector
Now, the Government want to roll this out to the private sector as well. It is to be implemented in April 2020 and was announced in the October 29th Budget.
This will hit the private sector badly.
Some companies may refuse to use limited company contractors in the future rather than taking the risk of having to stump up the tax if they get it wrong.
Others will make contractors take the new online HMRC IR35 test.
Contractors and Permanent Employees
Of course, we all know that a permanent employee and a contractor earning £100,000 a year are two different things.
There are all the benefits that a permanent employee gets like pension contributions, sick pay, holiday pay, maternity leave, national insurance, share options etc.
There is also the job security that the permanent person has and the contractor doesn’t.
However, this terrible injustice seems to have been implanted in their brains both by the big consultancies who see contractor as rivals in the marketplace.
Effect on Limited Company Contractors
So, How Many Contractors Will this affect?
The Government say that one third of all contractors are off payroll workers and not genuine freelancers. Those contractors should not be using limited companies, according to the Government.
However, the CEST IR35 test that HMRC has created has the following results after 750,000 tests:-
54% – Passed
41% – Failed
IR35 Penalties on Client Companies Using Limited Company Contractors
There are penalties on companies who declare that contractors are outside IR35 when they are really inside it.
However, if a contractor is later found to be inside IR35 but he, or she, passed the CEST test then the company would not be liable.
So, what are companies going to do?
Of course they will make the contractors sit the test.
Those that pass it will be allowed to contract to the firm using limited companies.
Those that fail will have to pay IR35, which will be deducted from their income before it gets to the contractor.
Contractors Will Join Umbrella Companies
As we have seen, from the rollout in the public sector, the more likely scenario is that the contractors join umbrella companies.
So, what will happen to the Indeterminables?
Do you really think that companies will take a chance on them? Do you think they will risk penalties on what are borderline cases?
So, effectively, 54% of contractors will be considered to have passed the CEST test and 46% failed.
So, just under half of all contractors who currently use limited companies will be considered to be inside IR35 (or perhaps inside IR35).
Contractors Will Have to Abandon Limited Companies
They will have to abandon their limited companies.
However, it could be even worse than that.
As happened with public sector departments like the MoD and HMRC itself, some companies will see this as too big a risk and will state that they will not hire any more contractors who operate through limited companies.
So, it is likely that more than half of freelancers currently using limited companies in the private sector will no longer be operating via their limited companies after April 2020.
So, what is going to happen now?
Abolish Contracting Profession – Public Sector IR35 Changes
Earlier the Government decided to change the way IR35 works in the public sector where they are the employer.
They decided that contractors would no longer determine their own IR35 status.
They decided that the Government department who hires them would determine each contractor’s IR35 status now.
If they got it wrong the department would have to stump up the tax, penalties and interest.
New HMRC Online IR35 Status Test
At the same time HMRC came out with the new online IR35 employment status test.
Departments would force contractors to take this with the results going to HMRC for future reference.
If they passed the IR35 test they could continue to use limited companies.
If they failed they would have to pay the IR35 tax.
Whoever paid them, usually the agencies, would extract the PAYE and national insurance before paying the contractors.
Much Stricter Rules on Self Employment
However, it could get even worse than this.
The Government has not yet spelled out the details of how this IR35 change will work in he private sector. That is still to come.
The Matthew Taylor Report, commissioned by the Government, recommends much stricter rules governing what is self-employment.
It seems that they will ban employers now from having ‘control’ over freelance workers.
It recommends that a freelancer will no longer be able to do a job that a permanent person previously did.
So, they are basically going to define the role and say whether it is inside or outside IR35.
IT Sector the Main problem
They say that the problems arise mainly in the technology and delivery sectors but it is spreading.
This will affect the majority of IT contractors. Most of them come in to work on projects alongside permanent colleagues doing similar work to them.
The Government will no longer allow this.
These are what IPSE used to refer to derogatorily as bums-on-seats contractors.
Lack of Control on Contractors
In future, companies will have no control over the work done by what the Government sees as genuine contractors.
They will not allow them to give contractors the specification, tell them what to do or monitor their progress on a weekly basis as if they are an employee.
When a company, currently, wants to create a new computer system they decide how many permanent staff they will need going forward after the project is over.
They hire extra ones if need be.
Then they take on contractors for the rest of the work on the project.
They can get rid of them easily when the project is over. They won’t need them all then.
Similar Work to Employees
The bulk of the contractors will be doing similar work to the permanent staff on the project.
This is how the majority of IT freelancers operate.
Indeed, the estimate is that 90% of freelancers operate in this way.
It seems that the Government will no longer let them do this in future.
The company, through its project managers and project leaders, have control over what these contractors do.
These measures will surely abolish contracting profession as we know it and leave just a small percentage of current contractors.
Matthew Taylor’s Final Report
Matthew Taylor’s final report landed on Theresa May’s desk in June 2017.
The report said that companies are abusing the law by taking on supposedly self-employed workers for jobs that are normally done by permanent employees.
Companies are doing this to avoid paying sickness benefit, holiday pay, pension and maternity benefits.
Forced to Incorporate
The report said that they are unearthing evidence that shows companies telling people to incorporate rather than taking them on the payroll.
This is arrant nonsense. How many contractors do any readers know who wanted to take a permanent job but were coerced into becoming contractors and incorporating by client companies.
This is not normally how it happens at all, although I’m sure you might find the odd case of it happening.
Providing State Benefits
Matthew Taylor wants to provide state benefits to contractors such as sick pay, social security and maternity leave.
However, it seems that this is the part of the report least likely to be implemented.
I wonder why!
Stricter Definition of Self-Employment
It seems that there is going to be a new, more clearly defined, definition of self-employment.
It also seems that this will be much stricter than now.
If this report gets implemented, most current contractors will be under threat.
Government Don’t Know What They Are Doing
I don’t think the Government knows how contracting operates.
Why should companies take on a lot of new permanent staff when they only need them for a short time, i.e. when there is a new major project?
That is where contractors come in.
Their hiring is flexible and they will go when the project is implemented and staffing levels ramp down.
The fact that they are doing a similar job to permanent staff shouldn’t matter.
When, and where, will this all end?
Government attacks on contractors just seem endless and interminable.
It looks like they want to abolish contracting profession for good.
Perhaps they will allow contractors to continue contracting but through umbrella companies rather than PSCs.
This is just the latest attempt by the Government to Abolish Contracting Profession.
Even after this, up to half of freelancers will stay pay less tax than permanent employees earning the same money?
The Prime Minister and Chancellor told us that this is an unfair anomaly.
Do you think that they won’t go after them too in future budgets?
Where’s IPSE in all this?
If you know anyone else who would find this article useful, please share it with them using the social media buttons at the top and bottom of the page. Other freelancers need to be warned.
See also, Contractors Umbrella Company Future – Limited Companies Doomed.
Any freelancers / contractors / temps / locums etc. in any field who want to connect with me to stay abreast of the situation, they can do so here https://www.linkedin.com/in/gerry-mclaughlin-6b658a3/
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They need to look at umbrellas ASAP.
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I’ve been a freelance software developer for 20 years and my experience says that most of this article represents more from public perception than it does from reality.
Do your writers not have actual industry experience?
May’s proposals are akin the the original reasons given for IR35, i.e. the ‘Friday to Monday’ principal, and I actually think they are a good thing.
This might lead to the end of “Contracting as a profession”, but certainlt not “Contracting as a business”.
Hi Paul, I can more than match your 20 years experience as a contractor and it is at all levels from software developer through Business Analyst, Project Manager, Systems Manager and then CIO in charge of a dept of 80 – all as a contractor. So, I do have ‘actual industry experience’. I disagree with your analysis that it is just reinforcing the original reasons for IR35. IR35 originally came about because newspapers (The Times I think) exposed companies who were laying off people on a Frday and starting them on a Monday as a contractors. This goes much further if implemented. They say themselves that they are going to change the definition of employment to be much stricter. This will affect all contractors who work on projects and who are controlled by the company through Project Managers etc. They don’t want to see anyone in PSCs any more. It will mostly umbrella in two years time. I wish there was a quoted one and I’d buy shares in it.
I think this reply is just as emotive, defensive, and offensive as the original article and doesn’t represent the market well.
My old English used to say “Don’t just ay something. Say why you believe this to be true. You have signally failed to do this and so I can’t really respond on any points you’ve made. It’s jut a bit of a whine.
To add, Paul couldn’t be any further from reality if he tried. The concept that this will not effect true contractors is a fantasy. In the end we are all under instruction. A plumber comes to my home I tell them what to do how I want it doing and I will even give them the specifications I want it to, where i want the pipes and what controls i want and where i want it wired to. Does this mean i now employ the plumber and have to pay him pension and sick pay? I am an engineer and a contractor, I can not do my job… in fact NO engineer can do their job unless they have the information, specification …. etc. A company may be supplying a welded structure but they will want to know the materials to what spec they are welding to, what loading etc etc. Does this sub contractor company suddenly become an employee of the contracting company? Alot of the time things like being in 9 to 5 on site not being able to work longer hours is all controlled by budget, they also want you on site as information has to be shared or you may ha e to answer to someone senior to you such as a principle engineer or talk with other departments… another is when the job your working on has a level of security to it they will not allow you to work off site. (Even if you work off site your under instruction!) Another completely ridiculous ir35 point is the right to substitute… again in my line of work I can not substitute anyone in to what I’m doing they will kot have a clue where I’m up to what the job entails what’s next they wont have knowledge of design meetings etc design intent… it takes weeks of being in a role to get this… there is so much more o could go in to why the whole thing is a joke, the biggest being forcing everyone to pay the same tax, I claim for new software worth 1000s every year update my PC every 18 months to 2 years to keep up with being able to do analysis, not to mention if I where to go to a company for say 3 months then kove to another for say 2 months then one for 6 months run a few other contracts from home what’s to do with the claiming mileage staying away from home etc?? The mind boggles it really does because all that will happen is companies will go bust my pay will drop not by 25% more like 60 to 70% because firms will want to pay the same as staff, therefore my actual tax contributions will fall by thousands so not only am I out of pocket but the whole real point in the government foing this, to collect more taxes will
Can we have a link to the original times article please? I can’t find it
I think The Times is subscription only online. I got the old fashioned paper version yesterday. It was on the front page.
All public sector contractors are forced to go under umbrella company after governments IR35 Shenanigans. Do you know how much take home that contractors will be getting from the Umbrella companies – 60%, 70% or above? Under limited company, most limited companies were getting 80-85% takehome. What’s the impact of this sudden transition on contractors takehome? When will this shenanigans gets to private sectors?
Not all Public Sector contractors. I’m working in the public sector on a defined role in a position that cannot be filled by a permanent employee. Having talked it through with the public sector body, we’ve reached an agreement of being outside of IR35, helped along by the HMRC tool. 80-85% sounds rather high to me though.
…They will not allow them to give contractors the specification..
so you have to do a project for us, but we cant tell you what it is
at least it would give a big boost to the psychics industry
Fellow contractors, don’t give up on yourselves because of this IR35. Take the leap of faith and travel outside this country where you would be paid and have a better life. As as long as this country remains as it is, they will leave the big corporations alone and come after the easy targets and that’s us the small guys.
Jump and leave them to it. When there is a fatigue and project delays, do you now what? Surely, they might yearn for us.
Can contractors work on a self-employed basis (ie no company in the middle either umbrella or contractor’s own)
I’m concerned that with £600 a week in travelling costs to some contracts I need to recoup these somehow.
I’d be intrigued to see the governments reaction to 10’s of thousands of small businesses closing down in a few months if this becomes law. Newspaper headlines such as ‘Theresa May closes 55,000 small businesses in 3 months’ might just make them think again but the damage could be done by that point.
Its nothing short of barking mad. The public wont even notice it until it starts impacting on projects that affect thier pockets or thier health. By which time itll be too late. This is a two pronged thing; the first one to continue to hollow out the middle class in the name of equality, which has been part of the globalist drive for over a decade and the second to drive more work and revenue in the direction of the big systems integrators, solution providers and outsourcers in return for directorships and consultancies after leaving Parliament – the old Blairite revolving door.
Its obscene, but IPSE are impotent and there is no opposition in the commons to speak of that is worthy of the name. All we are going to see is more of the same over the next 5 years. No matter how unfair all of this is, its not going to be bad enough for the proles to vote Corbyn in, even if he thought any different. And, thanks to the press, most of them will think we’ve had it coming for years as well.
the frightening thing is that the alternative is that all of the business goes to either
1) The big consultancies who make a massive mark up for providing the same contractor the company could have gotten directly for 1/2 the price
2) The off shore companies who seem to have half of their team on shore for years at a time
I dont understand how either of these is in the interest of the uk economy
What about if an employer takes on a current contractor on a rolling monthly zero hours contract, paid by the day worked, through PAYE? That way the client still takes on a contractors for a temporary project, still pays a day raye, still only pays the contractor for days worked, has no obligation to employ contractor more than is necessary, and can let the contractor go at the end of the project. All this would give the same level of flexibility as now to both parties. On the plus side, no costly accounting for the contractor, and they accumulate holiday pay.
I know. I updated it yesterday with fresh information after the budgt leak in teh newspapers.
It’s true that a lot more people will have to go umbrella.
That’s what happened in the public sector. It’s also true that rates may go up to support this. Rates for locum doctors went up by 6.3% in the 6 months after April this year after locums told us they had effective pay cuts of up to 30%.
However, it is supply and demand. As happened with locums and the NHS, some contractors would have to get out of the market to decrease the supply pushing rates higher. If the supply of contractor stays the same then rates are likely to stay the same – despite the tax hike.
I’m afraid this is a poorly argued article. The author is clearly emotive about the topic and this affects her/his ability to adequately and objectively write on the topic. I do think there are issues with the government’s approach to consultants and bigger issues with how their legislation is interpreted and implemented, with even huge government departments erring heavily on the side of risk averse at the expense of good outcomes as a whole. However, there are also issues with the contracting market that do legitimally need to be addressed and this article is only one sided. I’d appreciate a less emotive, logically argued piece so that contractors, companies, and decision makers could feel more informed and empowered to act. That way we can all hope for a better future vs. just listening to a whine.
It’s an old trick. If you can’t argue against the premise of an argument attack the person making it instead. As you’ve had just just a bit of a whine and as you have made no attempts to provide counter arguments there’s not much more that I can say.
” there are also issues with the contracting market that do legitimally need to be addressed”.
That’s a bit woolly a you don’t state what those are. I think you’d get about 3/10 from my old English teacher.
This is kind of an irony that soon the only way to avoid communism will be an escape to China.
I am a long term “Career” contractor.
I have had a number of perm jobs in my 15 years so far and a good number of those I have been made redundant / Company liquidated / Owner got arrested…in a bid NOT to sign on and cost the state…I go out and find a contraction job. I pay my taxes on-time, don’t put silly things like my family Christmas card post through the company as expenses, don’t claim breakfast of coffee on company, I work 50+hrs a week and get paid for 39hr
I have seen this a number of times before 2015, 2008, 2004 and hope it doesn’t come to pass.
I don’t get paid holiday, Travel, Sick, Tax credits, PENSION, Bonus, Shares, Insurances, Death in Service, Bank Holidays, Corporate Gym, Car, and many others . I take all these out of my wage, all this equates to me technically for every 12 months I work I only taking 9 Months gross and from there I pay all my taxes
My industry sees me working all over the country at 6-12 months periods, supporting my young family. so whilst the person earning £100k with 20% bonus (Regardless of benefits) take home = £73k pa ….me as a contractor on £100k (No Bonus) takes home £77k pa if I work every day, but if I take off only 2weeks to spend with my young family I go to £72k….I take out 5% pension I go to 69K pa….I take out my insurances, bank holiday ETC!!! LIKE FOR LIKE IS NOT POSSIBLE.
Let’s apply that logic to the congestion charge; a Prius with a curb weight of 2530lbs should pay the same as a 2500lb V8 Cosworth….instead of taking it on emissions as is logical… that same absurd logic can be applied to what Taylor is trying to spout
IF you don’t look at the whole picture you cant take the correct action, as per any good project…Matthew Taylor obviously is bias only one way….and I am NOT going umbrella after a number of experiences, only to get worse if they are the only route, and I am not unsticking my family to move to somewhere where a perm job is available suiting my skill set.
So alternatives or haven will have to be explored. Beggars belief
Too many “employees” decided it was a good tax dodge and jumped on the bandwagon and ruined it for the rest of us who were providing a valuable professional service. I don’t mind the tax being controlled, fairs fair, but the assault on real expenses is a joke and it will inevitably destroy the industry. I simply will not be able to service a wider client base as now I am effectively restricted to working nearby only. This in turn does not allow my business to survive as there is not enough work in any one area to make it viable. The only difference between me and a large consultancy is size. I do wonder if this is more lobbying from massive IT consultancies trying to clear the field of independents so they can control the market.
Many of us contract as we want to be our own bosses, have our own ideas, and want to progress into building up our own client base and products. We don’t want to be “one man bands” forever. It is a shame this is no longer possible. I don’t blame the government, I blame all the tax dodgers that have effectively ruined what was a perfectly respectable way to make a living.
You can’t compare here saying a contractor on 100000 Vs 100000, as we all know, the contractor on 100000 is likely working with peers who are on 50000-60000 so even after the hyped ‘up to 25%’ drop that still leaves them on at least 15000 more, ample to cover health care, sick leave and holidays. In reality it leaves them much more. I have no issues with a contractor earning more than their full time colleagues, but don’t bleat on about how hard done to you are. We all face redundancy whether permie or contractor. We all have bills to pay. The contracting bubble hasn’t even burst with this news, rather it has shrunk. But your still going to make more money than me, so please keep the whining and sensationalism to a minimum and instead report facts not hearsay, and focus on discussing how to prepare.
“Why should companies take on a lot of new permanent staff when they only need them for a short time, i.e. when there is a new major project?”
Taking on temporary permanent staff is easy though – it’s what umbrellas often do.
Why isn’t someone addressing umbrella companies that treat the rate that you agreed to as their money. Paying out tax ,employee , employers national insurance and aprentice levey all out of the rate you thought you were on .They can then use the employer national insurance to offset that against their corporation tax. They say your employed you are paying them to falsley claim you are employed. Taking the p to say the least
In reply to Helen’s emotive responses. I wish to give you an emotive kick int he rear. Either you are not smart enough to understand the contract market or you work for the government. very good points raised in the article. Make sure you don’t find yourself in front of me.
In addition to penalising Ltd IT contractors with IR35, now the government propose to impose a 4 day working week to all with same pay. I assume this won’t apply to Ltd IT contractors on a daily rate, we will have our incomes reduced by a further 25%. They are killing off the tech industry. We need protests, petitions will be ignored.