It’s difficult to predict how the contracting market will be impacted over the coming year. The 2019 Loan Charge and the introduction of IR35 into the private sector have been heavily debated over recent months with different parties – HMRC, contractors, companies and MPs – all seeking to influence the new legislation. In addition, Brexit may also affect the state of the market with many contractors and companies worried about the uncertainty and the outcome. Here we take a look at what contractors and HR teams need to keep an eye on in 2019.
IR35 has been a factious issue affecting the contracting market since 1999. This doesn’t seem likely to change anytime soon following the announcement that the Off-Payroll rules will be introduced into the private sector in April 2020. When the rules were brought to the public sector, it meant that companies, not contractors, had to take the responsibility of determining IR35 status; this led to significant issues as both companies and contractors struggled to adapt to the new landscape.
Understanding this new legislation will be the first hurdle for contractors, companies and recruitment agencies to overcome. All parties must find a way to successfully implement the legislation without it impacting the contracting market, sourcing talent or the hiring process. While some contractors may move into permanent employment, others who work through a Personal Service Company (PSC) may increase their rates to compensate for the incremental tax rise. Either way, companies will continually be competing against each other to make their offers more attractive to hire the most highly-skilled workers.
Prior to the implementation of this new legislation, HMRC will launch a consultation which will allow the contractor market to provide feedback on the planned reforms and help influence an outcome. Many issues have arisen from the public sector implementation of the Off-Payroll rules including the use of the HMRC CEST tool, blanket decisions and the availability of skilled flexible resources that companies need. Many hope the consultation will help to provide solutions to these problems before the private sector roll-out at the minimum.
It is important that prior to April 2020 HR teams fully understand the IR35 reforms and how this will affect them; 2019 will be an important time to keep abreast of the consultation. As it stands those companies hiring contractors from April 2020 will need to determine the IR35 status of contractors. Blanket decisions like we have seen in the public sector, i.e. automatically determining all contractors inside IR35, will likely make it significantly harder to source talent.
Ever since IR35 was introduced nearly two decades ago, introducing new tax legislation for contractors, a number of disguised remuneration schemes have popped up and targeted UK contractors. By using loans, the schemes offered contractors the opportunity to ‘evade’ IR35 tax. Many contractors have used these schemes, often without realising the potential ramifications, and it’s now estimated that around 50,000 will be affected by the 2019 loan charge.
Introduced in 2017 by HMRC, the loan charge forces such contractors to pay back the tax they inadvertently did not pay, with the demands for repayment kicking in from April this year. It has come under significant criticism, however, for what has been deemed a disproportionate response by HMRC, as well as for the financial burden it will place on contractors; many of whom were ill-advised by those running the schemes or were forced into the schemes by their employers and now face having to pay back large sums.
MPs have questioned the loan charge and the impact it will have on contractors and the contracting market. The Loan Charge Action Group has formed to protest against the loan charge and the House of Lords have conducted an enquiry into the issue, later publishing key recommendations to HMRC. This is something contractors are already following closely, and 2019 could see some significant rulings on the issue.
In addition to contractor-specific issues, Brexit is also influencing the current contracting market. The uncertainty around Brexit has caused slow economic growth in the UK which has stalled general investment in companies and projects. This has led to a knock-on effect across many industries – for the contracting sector in particular, it has diminished recruitment confidence. There is also uncertainty on how the outcome of Brexit will affect the status quo for contractors when it comes to the ability to travel to European offices in the EU and the double taxation treaty in place.
However, there are positives for contractors; with EU worker migration potentially decreasing, opportunities for UK contractors may rise. Combined with this, the UK is seeing an increasing skills shortage that the country is finding difficult to combat quickly. With companies needing to fill these gaps as soon as possible, advertised rates for contracting roles could see a positive increase.
Despite Brexit uncertainty halting some projects – more than £27 billion worth of technology projects have been put on hold, according to a report from Beaming – it has boosted certain areas for contractors. There is an increasing demand for contractors specialising in risk management and finance as companies prepare themselves for the outcome of Brexit.
Many of these issues have been building for a number of years and have led to an uncertain contracting market. Different sectors have had different fortunes and it is difficult to predict how these issues will affect contractors in 2019. However, experts from the industry have cited the demand for niche, highly-skilled contractors and the flexible opportunities in the UK as causes for optimism in the contracting market against the deterrents of IR35 and the loan charge.
Contractors are fundamental to help fulfil short term projects and specifically in IT to help fuel digital transformation in the UK economy. A strong flexible workforce is essential for HR teams to support their respective businesses with quick hires and niche skills. Hopefully HMRC and Brexit will not negatively harm the thriving and skilled contractor workforce we have in the UK.