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?
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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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