Is it end of the line for banking contractors?
Posted on 10th October 2019 at 09:13
More uncertainty and ambiguity awaits the contracting world as we approach the IR35 reform in April 2020, and this time it’s contractors in the financial services who are suffering the impact.
Barclays and Lloyds are the latest companies that have said they’re refusing to engage contractors working through a personal service company (PSC), after HSBC, Morgan Stanley and M&G Investments said the same just a few months ago.
The domino effect, as it has been dubbed, has extended to pharmaceutical giant GlaxoSmithKline, who has said that no more contractors operating through a limited company would be hired. There are currently 1,500 contractors under IR35 investigation at the company.
HSBC showed many of its contractors the door earlier this year with instant contract terminations after internal IR35 inquiries found that a number of them are disguised employees according to off-payroll working legislation. The global banking institution said that contractors operating under an agency or consultancy are in with a chance for their engagements to be renewed, but for those who work via a PSC, no renewal is possible.
Lloyds Bank has made their decision: will others follow?
On October 8th, Lloyds Bank released their decision on PSC contractors, saying that current contractors’ engagements will end before the new IR35 legislation comes into play in April 2020 – and the bank will not hire any further contractors unless they are operating via an umbrella company.
Current contractors will be offered the opportunity to switch to an umbrella company or take on a permanent position at the bank under PAYE. Unfortunately for contractors at Lloyds, management has given them just a couple of weeks – until October 25th – to make a decision regarding their next steps.
Should all contractors be worried? It might not actually be as scary as it all sounds
There could be a reason why it is the banks that are making these announcements - we are yet to hear from the big players in other industries.
Banks cannot claim back VAT costs that are charged to them when engaging contractor workers that work via an agency. For example, if a bank hires a contractor on a rate of £500 per day, the cost to the bank including the 20% VAT is £600 per day.
If the bank were to employ the worker under the PAYE scheme – so as a normal employee – and continue to pay them £500 per day, they would be required to cover the cost of employment taxes and the VAT. A cheaper option for the bank that would also benefit the worker is to hire the worker under PAYE on £600 per day, which would include all the employment taxes that must be paid, and with no VAT costs.
With this in mind, take home pay for the contractor would be near enough the same, providing the limited company that the contractor currently works through does not have more than one shareholder to split dividends and to make use of a combined lower tax rate.
With that said, everybody’s situation is different and no one worker can be pigeonholed simply because banks are required to pay VAT. As with all enquiries around IR35, judgements should be made on an individual, case-by-case basis.
So, we will wait and see, and follow closely, the developments over the next few months.
Contractors must stay informed - and we can help
This article is not intended to spread fear or worry amongst contractors - there is no reason to panic!
We are committed, as your accountant, to update you with factual, accurate information on topics that might affect you.
We are, unfortunately, living in a time of uncertainty and unease and the upcoming IR35 changes do not help matters. But we promise that we will do all we can to help you do the right thing for your career, your finances, you family if applicable and of course yourself.
The Autumn Statement is due to be released in just a matter of weeks, and we will update you if it contains anything relating to the upcoming IR35 legislation changes.
No trust in CEST tool
Unsurprisingly, it seems there is little to no trust left in HMRC’s CEST (check employment status for tax) tool, which has only been in use since March 2017. Despite HMRC repeatedly claiming that the relatively new tool is rigorously tested and constantly updated and improved, there is a huge lack of transparency over the assessment of the tool. This is not helped by allegations that full records of testing of the tool have not been retained.
Don’t leave it too late to prepare for IR35 private sector changes!
To support you through the upcoming changes happening in April 2020, we have put together an IR35 Private Sector: 5-Step Action Pack, which includes:
Full written IR35 Contract Review;
30-minute debrief call with Nicola to discuss the outcome of the IR35 Contract Review and its impact on you and your limited company;
Communications Pack including email and letter templates to send to your client to get your communications started, and in the event that you need to appeal;
30-minute call to discuss your very own action plan.
We are bundling all this together for our clients for just £297 +VAT.
Learn more in this free guide we've created for you, here.
Don't wait for your client to come to you.
Be proactive, take the initiative and get planning for April 2020!
Written by
Nicola J Sorrell
- Effective Accounting
Founder | Xero Champion | IR35 Expert
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