“Death, taxes and childbirth! There’s never any convenient time for any of them.” ― Margaret Mitchell, Gone with the Wind
The extension of IR35 tax reforms to the private sector has the potential to be highly disruptive. As I’ll explain here, it is vital to act now – and help is at hand.
As reported earlier this month in Computer Weekly, Lloyds Banking Group is the latest organisation to phase out its use of contractors who engage with the firm via personal service companies, in preparation for the IR35 tax reforms being extended to the private sector from April 2020.
IR35 describes two sets of tax legislation that are designed to combat tax avoidance by workers and the firms hiring them – those who are supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary were not used.
Under the reforms, medium-to-large private-sector organisations will take responsibility for determining whether the contractors they engage with should be taxed in the same way as salaried employees. At the moment, it is down to contractors to self-declare how they think they should be taxed. Importantly, following the change the hiring organisation will be liable for any mistakes, potentially incurring massive retrospective tax bills (think PAYE plus NI).
The new rules come into effect in April 2020 but Lloyds, similar to Barclays, Morgan Stanley and HSBC (to name a small few) has recognised that the problem needs to be addressed immediately. Anyone on a six-month contract will by default fall within the new regulations and dealing with the repercussions of a potential mass exodus will take months.
It is reported that contractors currently working at Lloyds have been asked if they would like to leave, become permanent employees or continue working at the firm through umbrella companies. This is the choice facing 1,000s of contractors across the country, and although it is anticipated that many will take the option of permanent work, this does not provide an adequate solution for organisations like Lloyds to manage peaks in demand. There is a limit to the level of permanent headcount organisations are willing to onboard, and when the reforms hit the public sector in 2017, some departments lost up to 40% of their contractors.
The alternatives are limited. Like Lloyds, organisations may offer contractors the opportunity to work through umbrella companies, but this is unlikely to be an attractive option for many consultants, offering a lower net income whilst not providing adequate employee security and benefits. It is clear therefore that many will have to rethink their resourcing options.
The natural alternative is to use professional service companies but the paradox here is that the majority achieve flexibility within their own workforce using contractors in the same way and are subject to the same challenges. It will be interesting to see how they respond.
Whilst the new rules are deemed unfair by some, being described in itcontracting magazine as “the tax war on professional contractors”, we at Scott Logic welcome the change.
We find ourselves ideally placed; over the last 15 years we have prided ourselves in our investment in our own people. Our UK-based workforce are all permanent employees and are therefore unaffected by the new rules. We will continue to provide the professional level of service our clients have come to rely on. Similarly, we can mobilise quickly in support of new clients as they grapple with the changes.