In April 2021 the changes to HMRC’s off-payroll working rules, commonly known as IR35, finally became effective. They had been planned for April 2020 but will put back by a year because of COVID. This is significant change to the market for temporary workers. Combined with the uncertainty caused by the COVID emergency, many contracts staff are faced with uncertainty.
Effect of the IR35 changes
The changes have been widely published and discussed so I won’t repeat the details here but in summary:
The party that pays the contractor is now responsible for determining if the contract falls inside or outside IR35. If it falls inside the contractor must be paid on a PAYE basis with income tax and National Insurance deducted. If the contractor is engaged through an agency or other intermediary the responsibility lies with them not the organisation to which the contractor is providing services.
The legislation covers workers both in the public and private sector. Workers in the public sector have been covered by these rules since April 2017; the rules were extended in April 2021 to include the private sector. The definition of “inside IR 35” is now very broad. HMRC can, and do, overturn decisions and apply back tax and National Insurance. The end client or agency has to pay this, not the contract. For this reason, most contract assessments err on the side of caution; it is now very hard to find contracts outside IR35.
Impact on contractors – it is not all bad
The good news is that, a few months into the new arrangements, it does not seem as bad as many had feared.
Firstly, in some areas contract employment through limited companies just was not appropriate. Low paid workers had been forced off payroll and into contracts through limited companies. From the contractors’ point of view this was all bad. The cost of running a limited company outweighed any tax advantage. They lost the security of employment such as sick and holiday pay or regular hours. The change was done entirely for the employers benefit, not their staff.
For the highly skilled sector, things could have been very different. The contractor market created huge benefits for both employers and contractors. These went far beyond the tax benefit to the contractor. In, for example, IT there is often a need to bring in specialist resources on a temporary basis. The cost of employing an expert in a particular area for maybe a short phase of a project is unattractive. The huge pool of highly skilled resources with a wide range of specialisms allowed companies to bring in a contractor just when needed. After a week, a month, maybe a year when the work was finished, the contractor could walk out the door. No hard feelings, no redundancy no ongoing liability for the employer.
From the experiences of some of my clients, the IR35 change has actually worked in their favour. The fear of losing access to the pool of skilled resources has coupled with a general boom in demand for it skills. Companies have had to increase salaries to secure the resource. In some cases, the basic salary offered has been higher than the day rate paid to former contractors. Factor in holiday pay, sick pay, pensions, bonuses etc and the former contractors have been left very happy.
Options and opportunities
There are a number of options going forward. The choice for the contractor does of course depend on their personal preference and the opportunities open to them.
COVID has disrupted the whole job market but I suspect once normality returns there will be many vacancies for positions which formerly had been filled by contractors. The economic bounce back after COVID may well push up wages to the point that you did not feel the lost tax benefit of contracting.
I will be blunt; I do not like umbrella companies. The fees they charge are eyewatering, especially compared with the cost of running your own limited company. Their quality of service varies and can be very poor. However, you may not have a choice, other than not taking the contract. If you do need an umbrella company take some time choosing and don’t be afraid to switch to a different one if it doesn’t work out.
Carry on contracting
The contract option does still exist, at least in some sectors; it’s just harder to find. So don’t rule it out entirely.
Operate as a sole trader
This option it may be available in some areas such as construction. A number of my clients have found work under CIS (Construction Industry Scheme) provided they we’re engaged as a sole trader, not a limited company.
Post Script – The petrol shortage
I drafted this article last week before the queues started building up at petrol stations. The shortage of truck drivers does not just affect fuel deliveries. Many parts of the haulage industry are warning about the impact across the supply chain. This morning (1 October), I heard on the news that there is now a shortage of butchers.
The BBC published a survey of ex-truck drivers who left the industry recently. About 50% have quoted IR35 as a reason for giving up. The lesson from this is that in the current economy employees the demand for certain skill sets greatly exceeds supply; the IR35 changes have clearly reduced the supply but of course did nothing to reduce demand.
Clearly, this puts employees in these areas in a very strong negotiating position. They may no longer be able to get the benefits of working off payroll but should expect salaries to increase to compensate.