Programme and project management is facing the most extraordinary period in its history. Thousands of self-employed people providing specialist services to major banks, utilities, telcos, engineering firms and more, are downing tools and walking away from contracts. The scale is unprecedented – some 75% of contractors, consultants and freelancers are making an exit.
The cause? IR35 reform.
From April 6, new IR35 reforms come into effect in the private sector. From then onwards the onus will be on medium / large companies to ensure any contractors who provide services to them through a limited company or personal services organisation (PSC) are paying the correct amount of tax.
Previously, it was down to the contractors to determine their status as ‘outside IR35’ (so not a disguised employee ie they pay themselves a salary, dividends and pay corporation tax from profit), or ‘inside IR35’ and liable for client’s employment tax.
We are seeing a worse-case scenario play out, whereby major companies like Vodafone and HSBC are banning PSCs from the supply chain altogether rather than risk HMRC wrath.
Wide-scale blanket ‘Inside IR35’ assessments are also taking hold. The reason being, if you are a business that employs hundreds of contractors or freelancers to deliver specific pieces of work on a short-term contract, then there is a huge amount of work involved in determining whether every one of them is working inside or outside IR35.
For some the task is too great so they have chosen to place everyone inside IR35 and minimise the risk of getting it wrong and a tax bill, or they are insisting on using what is known as an umbrella – whereby a third party administrates the contracts for many individuals on the company’s behalf, removing all risk completely.
It appears that the legislation brought in to ensure fair taxation is in fact causing a tax black hole as thousands vote with their feet and refuse to go ‘inside IR35’.
The notion that it is acceptable to continue for a client paying the employee’s and employer’s tax liabilities (national insurance, apprenticeship levy) without any of the security of benefits (sick pay, holiday, right to a tribunal) jars.
Instead, the majority, would rather stop working for a while, pay no tax, and tap into savings until the market sees sense. Others are looking for outside IR35 roles, but they are diminishing rapidly. Some are therefore actively looking at moving abroad to countries that value their skills and will treat them fairly.
But there is a minority that’s caught. For them they must find an outside IR35. Otherwise the option is to close the business that they have worked hard to build and take a permanent role. But that is fraught too. The skills people have are generally only needed for a short-term so the likelihood of finding a permanent role are low.
These factors are forcing some to take the risky road of going inside IR35 at their existing client even though it could wave a red flag to HMRC that they should have working that way all along and should pay a retrospective tax bill. But with mortgages to pay (15% say their homes are at risk) and mouths to feed they have no choice.
It’s a situation no-one could have predicted, and the consequences of the walk out are far reaching. In recent days the press has uncovered just how bad it is. Keeping the lights on at National Grid to missing regulatory commitments at major investment banks as is the case at Deutsche Bank are among the many stories surfacing.
It also stands to create a productivity gap of around £2.2bn in April – the first month of the reform’s implementation – as the human capital to deliver projects vanishes with no mitigation to stem the flow and replace the talent.
This far outweighs the income HMRC hopes to make of around £1billion in the first year. But the facts are there to show there is no mitigation – 85% of project managers say their client has no plan to mitigate the exodus and 52% say the scale is far greater than clients expected.
The human cost is also stark with 31% of people saying they are dealing with heightened anxiety and facing nervous breakdowns as they watch their industry implode because of reckless implementations by the major sources of work.
So, what now you might be asking? Well, companies like ours, and professional bodies like IPSE as well as Dave Chaplin editor of Contractor Calculator and force behind ‘Stop the offpayroll tax’, are lobbying for a halt to the implementation in April so time can be taken to properly understand the repercussions we are witnessing and set a new and better direction for everyone. Their efforts saw over 800 people march on Westminster on February 12th.
The result of the campaigns is that many MPs are now listening to their constituents and putting pressure on the Treasury to do the right thing. There is also a Lord’s Inquiry underway looking at the consequences and the mismatch between employment rights and taxation.
As a result, we have started to see some attempts at concessions from HMRC, including a three-week period of grace for assessments. And at the weekend, at a business event in Birmingham, Chancellor Rishi Sunak said there would be a ‘softer landing’ than planned.
But it’s too little too late – hundreds of PSC businesses are in the process of being dissolved, thousands are leaving contracts. The turmoil is starting. The damage is done. People have reacted to being demonised for their flexible working practices and pushed out of running a business by PLCs.
Reversing this trend can only be done with greater concessions – a pause and a rethink. No one contests fair tax but they do contest the way IR35 is being implemented. And one has to ask, where is the value in continuing as we are if it erodes British skills, our economic future post Brexit and people’s lives?
