IR35 Contractor ‘Bug’
Unlike the Millennium Bug the IR35 contractor ‘bug’ could have a huge detrimental impact on every single major UK company in the land.
I worked on fixing the millennium bug and was never afraid of what might happen. It was a massive amount of very tiny and easy changes which could be replicated over and over again.
It made a load of money for those consultants pressing the fear button on major companies. Making those changes, I was never worried about what the profits of millennium doom were saying.
However, I am very afraid of the huge impact that the IR35 contractor ‘bug’ will have on all our major companies.
Questions on IR35 Contractor ‘Bug’
- Why is the impact of the IR35 contractor ‘bug’ sill largely a secret?
- What is IR35?
- Why do Governments Keep Taxing Contractors More?
- How did the Government think the IR35 reforms would work in the private sector?
- Who Now decides a Contractor’s Employment Status?
- Why did HMRC Fine the NHS for Misuse of the CEST tool?
- Why are all the UK’s top companies blanket banning PSC contractors?
- Which Companies are blanket banning PSC contractors?
- What do the Mainstream Media know about the IR35 Contractor ‘bug’?
- Did the Government Expect so many companies to blanket ban contractors?
- Are contractors meekly accepting their huge pay cut?
- What does our poll say contractors are going to do – Leave or Stay?
- How many contractors are going to dump their blanket banning client companies?
- Are companies who use contractors now seeing the scale of the IR35 contractor ‘bug’ problem?
- Is Chancellor Sajid Javid for or against the IR35 changes?
- What Effect will the IR35 Contractor ‘bug’ have on our major companies?
- Will the banks and financial companies be ready by the LIBOR de-commissioning date?
- Does the Stock Market Know about the impending UK financial crisis?
- When will the Financial Markets learn about the IR35 contractor ‘bug’ and the effects it will have?
Why is the impact of the IR35 contractor ‘bug’ sill largely a secret
Our top companies are already having emergency meetings to see how they can cope past IR35 reforms implementation date on April 6th.
Yet, unlike the millennium bug, the mainstream media, who had a field day then, know nothing about the contractor IR35 ‘bug’.
What is IR35
For those that don’t know what it is, IR35 was set up to stop the scam of people leaving companies as an employee on a Friday and rejoining ahe same company on the Monday doing exactly the same job at the same desk.
The Government called hem ‘disguised employees’ and that’s what they were. They put IR35 on the statute books to stop this. They wanted those ‘disguised employees’ to pay the same rate of taxes as employees and not small business with limited companies.
However, it grabbed more genuine contractors into its net than was intended.
Why do Governments Keep Taxing Contractors More
However, when various Governments saw the extra accidental cash that was coming in they saw freelancers as soft targets – and have ever since. Every government since has had another bite at contractors and their income. They consider them to be employees from a taxation perspective yet they get none of the benefits that accrue to permanent employees.
Contractors always decided their own employment status, employee or small business person. However, the Government changed the rules in the public sector in 2017 so that the hiring organization would decide a contractor’s employment status.
Now they are going to rollout the IR35 reforms to the private sector on April 6th 2020.
How did the Government think the IR35 reforms would work in the private sector
What they thought would happen is that companies would test their contractors for their employment status using HMRC’s CEST tool.
Some contractors would pass the test and be outside IR35. They would continue to use their personal services companies. Perhaps there would be 60% of contractos in that category.
Other contractors would fail the test. Those contractors would have to pay PAYE like an employee of the company. Most of those contractors joined an umbrella company when it was applied in the public sector.
Who Now decides a Contractor’s Employment Status
Now companies hiring contractors have to decide the employment statuses of their contractors. If they get it wrong there will be massive fines on them for all their contractors missing back tax, penalties and interest.
HMRC said that if companies test a contractor using their CEST test and he or she is judged by it to be outside IR35 they will stand by the results even if it was shown afterwards that the contractor was really inside IR35 at the time.
There’s just one proviso.
The correct answers must be input to the test.
Why did HMRC Fine the NHS for Misuse of the CEST tool
Like Macbeth and the promises from the three witches the NHS took solace from that. The IR35 reforms were implemented in the public sector in 2017.
So, the NHS tested all their contractors using HMRC’s IR35 test.
Some were tested outside IR35 and so were able to continue to use their personal services companies. Others tested inside IR35 and had to go PAYE usually through an umbrella company.
However, HMRC decided to fine the NHS £4.3 million for ‘misuse of the CEST tool’.
This was possibly to encourage the others, i.e. private sector companies who were deciding what to do.
After all, this fine was just moving money around from one Government department to another.
Why are all the UK’s top companies blanket banning PSC contractors
Suddenly an avalanche of the top UK companies decided that the legislation was too complex and the risks were too high. There is also the red tape from testing contractors and sending on the results to HMRC.
Instead they decided to do away with contractors who operate via personal service companies altogether. They are not allowed to blanket assess contractors but they can put a blanket ban on using PSC contractors.
And that is what many, many of our biggest companies have done. At a stroke this IR35 legislation is destroying the flexible market in freelancers which has operate successfully for many years.
Companies already work with the optimal blend between permanent employees and freelancers. Any change with that mix will mean that all our big companies will be operating at a sub-optimal level.
Which Companies are blanket banning PSC contractors
Already all the UK’s major banks, and many of the smaller ones have decided to blanket ban contractors using personal service companies. So have companies like BP and Vodafone among many others. Just about all of the UK’s top companies have decided to blanket ban contractors using personal services companies.
What do the Mainstream Media know about the IR35 Contractor ‘bug’
This will have a massive impact on the whole of UK industry. Yet the mainstream media and financial analysts on those big companies appear to know nothing about what is happening.
Operating as PAYE off-payroll workers rather than as small businesses in their own right will have a massive financial impact on the take home pay of freelancers.
Did the Government Expect so many companies to blanket ban contractors
I don’t think the Government and HMRC expected that almost all the UK’s companies would blanket ban contractors because of this legislation. It didn’t happen nearly so much in the public sector. However, those who did blanket ban contractors were hit by heavy defections and IT projects that had massive delays.
However, even if they did not expect this, they are doing nothing about it. I would presume they are rubbing their hands at the extra income this is going to bring in.
Are contractors meekly accepting their huge pay cut
However, this would only work if contractors decided to take the massive hit in income meekly and stayed in their current positions as off payroll employees.
However, that is not happening. A large chunk of every major UK company’s freelance project workers have decided not to take their company’s ungenerous offer of far less money to do the same work.
What does our poll say contractors are going to do – Leave or Stay
We have a poll here, at the right hand side at the top of the page (desktop node for mobiles) about what contractors would do if their client company wanted to impose a blanket ban on them. The results, so far, are as follows:-
77% – Leave and look for another contract elsewhere
11% – Join an umbrella company
8% – Take a permanent job
4% – Go PAYE with the Agency
There have been 1,046 respondents.
Now, you would have to say that there may be a fair amount of wishful thinking here. But it does show what they are thinking.
So, what is happening in practice?
How many contractors are going to dump their blanket banning client companies
Contractors are telling us that at every single company that major amounts of freelancers are upping tools and leaving the companies rather than staying on as PAYE off-payroll employees.
One contractor told us that it was 40% who were leaving. He was staying on reluctantly but like many others he was circulating his CV with the various agencies and job boards.
Another contractor at another major company told us that 40% of his project had told the company that they would leave before the April implementation date. He said that 70% of the Project Managers had told the company that they would leave. I would say that this would be a helluva blow to the company’s projects.
One company manager described the looming effects of the IR35 legislation on his company as a ‘catastrophe’.
Are companies who use contractors now seeing the scale of the IR35 contractor ‘bug’ problem
I’m told that emergency meetings about what to do about this emerging crisis are taking place up and down the lands. Now that they know what the full scale of he problem is they are doing impact assessments.
And yet, the mainstream media, the country, financial analysts and the Stock Market are blissfully unaware of this impending crisis.
Is Chancellor Sajid Javid for or against the IR35 changes
When Chancellor Sajid Javid was Managing Director of Deutsche Bank, and an avid user of freelances like all banks, about a decade ago he said that the Government should ‘repeal the silly IR35 tax’.
It’s not just silly now. It is complete madness. Yet he is presiding over it now.
All those contractors who are leaving will not only take their skills and experience with them but also their knowledge of the business and the computer systems run by it.
What Effect will the IR35 Contractor ‘bug’ have on our major companies
All our major companies’ new computer systems will be delayed which means that their slower time-to-market for the software component of heir new products and services will potentially hit them when set against competitors who can get their new products and services out quicker.
With financial companies there are a number of regulatory computer systems that now have to be in place for certain dates. The mass exodus of so many of contractors from the financial companies, like the banks, will mean that they may not get crucial regulatory computer systems done on time. What would be the outcome of that?
Will the banks and financial companies be ready by the LIBOR decommissioning date
Then there is LIBOR decommissioning projects taking place at so many financial institutions across the UK. I’m told we’re talking of trillions of dollars here ivolved.
All banks and financial institutions have to be ready by the end of 2021 with their computer systems in place.
According to a Government statement release:-
” On July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop compelling banks to submit London interbank offered rates (LIBOR) by the end of 2021. The New York Fed has started publishing the Secured Overnight Financing Rate (SOFR), a new reference rate based on overnight loans collateralized by U.S. Treasuries. SOFR is the anticipated replacement for the LIBOR index. “
It may seem still along way off but I’m told by an insider at one major bank that the project schedules have been severely hit and the management is currently having impact assessments.
Does the Stock Market Know about the impending UK financial crisis
Yet the Stock Market and the financial analysts in the sector appear to have no knowledge of what one manager says is a catastrophe.
Perhaps someone will find out and start short selling the shares of our major banks in April.
Yet the most ridiculous thing about all of this is that the prediction of how much money this tax will bring in is the equivalent of less than one tenth of a penny in the pound on income tax.
But they are prepared to destroy the flexible market in freelancers and put at risk all of the UK’s major companies to get that piffling amount of tax.
When will the Financial Markets learn about the IR35 contractor ‘bug’ and the effects it will have
At some point the Stock Market and the market analysts are going to find out what madness is going on here.
What would be the Government’s attitude if there was a series of announcements in spring to the Stock Market from our big companies downgrading profits due to the IR35 changes after they have completed their current impact assessments?
Anyone know how to short financial stocks in April?
Please share this article using the social media buttons at the top and bottom of the page.
Ad – Contractor Services
Many private sector contractors are likely to be told by their client company either that they must operate as an off-payroll employee or join an umbrella company. It’s time to plan for that now.
They need to look at umbrellas ASAP.
Do you need an umbrella company that is right for you and returns you most? Fill out the form below to receive a call today.
For all necessary business insurance, including IR35, click on Business Insurance for Contractors
