Will 2020 mark the end of the road for contractor firms?
With new off-payroll rules slated for April 2020, accountancy firms serving contractors are concerned about losing some of those clients. Is this justified, or an overreaction to the new regulations?
In the late 199s, changes in legislation and the shifting economic landscape led to a boom in the freelance contractor market within accountancy. Before long a new breed of specialist accounting firm surged ahead of the practitioner pack with efficiently packaged, high-volume, low-priced services.
These ‘contractor superfirms’ served thousands, in some cases more than 10,000, clients, becoming household names in the profession and attractive investment opportunities for those outside it.
However, the latest April 2020 reforms to off-payroll working rules announced in March prompted some industry commentators to predict a bleak outlook for the contractor market, and for the firms that made their names catering for them.
In a post on AccountingWEB’s Any Answers forum, member CR stated: “I have a large number of IT consultants on my books and am getting worried.”
CR went on to outline their belief that firms specialising in IT contractors could see their client base slashed by around 20-30%.
However, while CR remains concerned about the future, the impact on their bottom line remains uncertain. “Although I stand to lose a large chunk of my client base, I potentially stand to pick up some clients if larger firms such as SJD, Crunch, Nixon Williams, etc get bowled over.”
Too soon to say
While some in the sector are predicting storm clouds ahead, it’s very much a case of wait and see for Chris Maslin, whose firm Maslins made its name providing support to contractor companies.
“I’m not necessarily saying the [20-30% drop in clients] is wrong, but surely at this stage it’s a complete guess,” said Maslin. “If every end client who uses contractors plays it very safe, the real figure could be far higher than 30%. If they all take a pragmatic view, it could be far lower.”
There is even a school of thought that limited company contracting might actually increase, Maslin told AccountingWEB. This is due to workers who previously avoided it due to the uncertainty of IR35.
“Remember, post-April 2020 the end client is taking the risk, so risk-averse workers may be more inclined to work via a limited company if the end client is happy it's outside IR35 than the worker would have been before.
“In reality,” continued Maslin, “my view is we’re certainly not preparing to close up shop, but equally we’re not planning on suddenly diversifying. A bit like with Brexit, we’re not happy about what’s coming, but I don’t feel we have a better option than just waiting to see how it pans out.”
MTD ‘the next nut to crack’
Reacting to the post, AccountingWEB members anticipating a potential contractor client collapse had mixed feelings.
Regular poster ireallyshouldknowthisbut stated that they are likely to lose clients to the new rules, but had been preparing for this for some time.
“I have been careful who we pick up in the last three years, and only taking on the ones who look like ‘proper’ contractors and not ones who are in the grey zone.”
AccountingWEB member Slim added that they believe the writing has been on the wall for some time. “I think it will be messy and [contractor firms] will lose the majority of these clients.”
However, Glenn Martin, owner of north east-based firm Avery Martin, believes that contractor firms may prove to be more adaptable than many have predicted, particularly with the government’s Making Tax Digital (MTD) plans coming into sharp focus.
“[Contractor firms] are compliance factories driven by process,” said Martin. “MTD is a big compliance project. In New Zealand and Australia where they did their version of MTD five years ago, huge amounts of clients were brought into compliance and the number of accounting firms increased greatly.
“I think you will find they will adapt to deal with MTD filing if contractors drop off,” Martin continued. “The next nut to crack will be if MTD rolls out to accounts and non-VAT businesses. Who will do the sole trader taxi driver or window cleaner’s five submissions a year at a price they can afford?
“I suspect the online firms are best placed to come up with a system that will deal with this, as already I see many small firms shedding sole traders as the clients no one will want soon.”
While the sole trader market is not for everyone, with two million potential clients up for grabs Martin believes that if someone can come up with the right solution, at a price the market will stand, then they could be in a strong position to get ahead of the competition.
For Darren Fell, founder and CEO of Crunch, one of the firms in the eye of this supposed storm, planning ahead has played a big part in how his practice has reacted to the rule changes.
Having participated in the consultations for several years, Fell believes his firm is in a good position both to react to the changes and offer its contractor clients timely advice about the extension of off-payroll working rules.
Fell’s view, based on analysis from HMRC and Crunch’s own research, is that only a small proportion of their client base will be directly affected by the rule changes and elect to move into full-time employment.
“Yes, we may lose some clients,” Fell told AccountingWEB, “but we’re already factoring this into the other services we provide, such as accounting for sole traders, a new service targeted at small businesses and our own ‘Crunch Umbrella’ company, which was established in 2016. We also offer a service for our limited company clients to operate an IR35 payroll, so they can continue to operate their companies while taking on IR35 contracts if they need to.”
According to Fell, it’s also important to remember that off-payroll working rules have been around for many years, so those who are genuinely self-employed will continue to be classified accordingly, and will not be affected by the 2020 changes.
“We’ve heard the horror stories from the public sector about the blanket application of an ‘employed status, within IR35’ for contractors,” Fell continued, “but HMRC’s own analysis, which underpinned the extension of the rules to the private sector, concluded the practice was not as widespread as reported.”
In Fell’s view, HMRC will need to take steps to deter end clients from establishing blanket employment status conclusions. It will also need to ensure the new rules are underpinned by a suitable penalty regime for non-compliance by the same end clients.
“Our message to any accountants trying to work out the impact of the extension of IR35 rules on their client base is simply to understand the nature of their clients’ businesses and introduce the services they require to continue operating,” concluded Fell.