Anthony Sherick, MD of ContractorUK
The contracting market in 2019 is set to be influenced by several key issues including Brexit, the debate around IR35 and the enforcement of the 2019 loan charge. The latter two have been particularly dominant in industry debates in recent years, with both companies and contractors affected by the legislation. Brexit uncertainty is also affecting the contracting market by slowing down UK economic growth which has repercussions for the recruitment of contractors in several industries. Here we explore how these issues will affect the contracting market this year.
Brexit and the UK economy
The uncertainty around Brexit has already slowed the UK’s economic growth in the last couple of years. The fact that companies are still unaware of the terms of the UK’s exit means it is difficult to plan for the future. In turn this is impacting the contracting market, both positively and negatively.
The lack of recruitment confidence amongst companies and agencies means there may be less opportunities available for contractors during this period. On the other hand, companies that do need workers may turn to contractors over permanent employees who are less flexible and agile and more expensive to administer. Contractors are vital to the UK economy as they are niche talent that are always upskilling; they move from job to job and can provide critical resources to growing companies.
The technology industry in particular is continuing to grow – despite the slowdown in the wider economy – and with it there is an increasing skills shortage that the UK is struggling to correct; this means contractors could see positive rises in advertised rates for roles.
IR35 rollout to the public and private sectors
Introduced in 2000, IR35 legislation was designed to ensure contractors were paying the correct taxes. It targeted contractors labelled ‘disguised employees’ by HMRC – those that used intermediaries such as Personal Service Companies (PSC) but who would otherwise be an employee without the intermediary. Contractors were made to determine if they fell ‘inside IR35’ – and therefore were subject to PAYE tax – or could continue to operate ‘outside IR35’.
HMRC decided to expand IR35 further in 2017 by forcing public sector organisations to take over responsibility for determining IR35 status from contractors. This caused significant confusion as both public bodies and contractors struggled to adjust to the new rules; with the CEST tool provided by HMRC for determining IR35 status coming under particular criticism.
Despite these issues, HMRC plans to roll out these rules into the private sector in April 2020 which has the potential to damage not just the contracting market, but private companies as well. At a time when many are suffering from stagnant growth due to the political climate this is an extra issue that simply isn’t needed. Hurdles companies will need to overcome include implementing the rules without impacting their ability to source and hire contractors, using the CEST tool, and competing with other businesses to attract niche talent amidst a skills shortage.
For contractors, who will lose their ability to determine their IR35 status themselves, they will want companies to avoid implementing blanket decisions on contractors as many public sector bodies did. While some may choose to turn to permanent employment, some contractors who work through a PSC may have to look at increasing their rates to compensate for the reduced take home pay.
The impact of the 2019 loan charge
In addition to the impact of IR35, the 2019 loan charge, announced in the 2016 budget, will come into force in April this year. It’s aimed at contractors who used disguised remuneration schemes to designate their income as loans – thereby avoiding tax. The loan charge seeks to recover the tax lost by these schemes since April 1999 which means contractors could owe HMRC huge sums of retrospective tax.
Advertised as legal – and recommended by third parties – many contractors have used these schemes over the last two decades. The only options for contractors to avoid the loan charge included a settlement agreement with HMRC before next month or challenging their advisers on their involvement with the disguised remuneration schemes. It’s estimated that around 50,000 contractors now face having to pay back large financial sums – some in regions of £100,000. Many are worried about the huge sums owed and the devastating impact it will have on their life having to deal with the financial burden.
The loan charge has come under significant criticism from the contracting industry as well as many MPs who believe that the charge is disproportionate and places too much of a burden on contractors. The House of Lords published key recommendations to HMRC after conducting their own enquiry into the issue following protests. Despite ongoing legal and parliamentary action, the loan charge looks set to go ahead next month.
With HMRC determined to introduce new regulations, many in the contracting industry are worried that IR35 private sector reform and the loan charge could stifle the market and put contractors off working in the industry. With many public sector bodies still struggling to adjust to the Off-Payroll rules, there will most likely be a period of uncertainty when the regulation is introduced to the private sector in 2020, potentially affecting the recruitment process for the contracting market.
However, many experts believe the contracting market will remain strong thanks to the huge demand for niche contracting skills, a desire for digital transformation and the flexible opportunities on offer in the UK. Areas such as technology and finance are continuing to thrive despite the Brexit turmoil and companies are increasingly looking for flexible, highly-skilled workers such as contractors.