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IR35: Banks move to clamp down on contractors

Barclays and Lloyds have become the latest big businesses to inform contractors that their engagements would not extend beyond the introduction of new off-payroll working rules. Contracts will instead be arranged on a PAYE or umbrella firm basis.

9th Oct 2019
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The move is the latest in a string of similar statements from companies such as HSBC, Morgan Stanley and GlaxoSmithKline that have announced they will no longer be using limited company contractors from 6 April 2020.

In a letter to line managers picked up by ContractorCalculator, Barclays this week informed staff that as a result of the changes to the off-payroll working rules, from 1 October it will not extend the contracts of contractors who provide their services via personal service company, limited company or other intermediary beyond February 2020.

Barclays contractor letter

“From 1 January 2020, new contracts and contract extensions will be arranged on a PAYE basis only”, stated the letter.

“Contractors who provided their services via a personal service company, limited company or other intermediary and who choose to continue working for Barclays can do on a PAYE basis (via the agencies and manage service providers they currently use).”

Lloyds will not extend contracts for those using personal service companies beyond 20 March 2020, with contractors being given three options: leave the company at the end of their contracts, take a permanent job (if an appropriate role is available and their skills merit it), or join an umbrella company.

According to the ITContractor site, Lloyds contractors were informed at one-on-one meetings yesterday that they had until 25 October to let the bank know which option they would prefer.

‘Impossibly complex’

Reacting to the banks’ decision, IPSE’s deputy director of policy, Andy Chamberlain labelled the decision “short-sighted”, “extremely damaging” and “bad for business”.

“IR35 is impossibly complex, and for a long time, we have warned the government against forcing this complexity onto businesses across the UK,” said Chamberlain. “The risk is that they will panic, as Lloyds seems to have done, and harm the self-employed and the wider economy.

“Perhaps worst of all, this may just be a taste of things to come when the changes to IR35 come into force next April. We urge the government to halt and rethink this dangerous policy. Now, facing an uncertain economic future, this country needs the flexibility and dynamism of the self-employed more than ever, and the government must do more to support them.”

Taking away the risk

Reacting to the Barclays letter, employment taxation expert Alastair Kendrick told AccountingWEB that while he didn’t necessarily agree with the action, he understood the position taken by the bank.

“Barclays operate under the Banking Code and need to take a whiter than white stance. By taking this action they’ve taken away the risk,” said Kendrick.

“Also, they are such a massive organisation that they might not pick up everyone engaged by a limited company. Is it worth the aggravation of doing all the checking? Going through the hassle that’s going to be created by the CEST test, people disputing their rulings and so on? From a corporate perspective, it makes a lot of sense.”

However, for Kendrick, the position could have a knock-on effect on staffing. “Barclays has the right to do this, but if those contractors are required by the business then they have the right to say ‘I’m not going to work for Barclays’ as well.”

One of the broader issues at stake is the potential for smaller businesses affected by the new rules to take Barclays’ lead and issue similar blanket bans on contractors.

“It won’t be at all surprising if other businesses follow suit,” said Kendrick. “Other businesses might say ‘Barclays is doing it so we’re going to do the same’ and reach the same position.”

Off-payroll aftermath

For IR35 expert David Kirk, the real question is going to be how the market calms down in the aftermath of the April deadline – whether contractors find their net pay falls or on average stays the same.

“When the public sector rules came into force in 2017, IT contractors had the option of moving to private companies and saying ‘I don’t work for the public sector’, and the net pay for an awful lot of contractors continued to remain the same.”

However, with the rules now spread across both sectors, Kirk believes there is a possibility some contractors could see a dramatic fall in their net pay, with expenses being a major factor. “Those that currently claim travel and four nights B&B in London will be out of pocket,” he said, “whereas those with lower overheads may not see the same fall.”

Kirk also pointed out that there may be opportunities to work abroad for multinationals in countries such as Switzerland where the rules do not apply.

Firms could face ‘a significant hit’

AccountingWEB readers have also been expressing their concern on the site’s Any Answers forum. In a post last week, AccountingWEB member GR stated that clients had been contacting them about how to close down their PSCs, and the tax implications of the new rules. “Judging by emails I am expecting at least 20% of my client base to disappear,” said GR.

Regular contributor ireallyshouldknowthisbut stated that they are expecting “significant fall out” from their contractor client base. “This is about 25% of my turnover, and by far the most profitable bit too so it’s a significant hit our side.”

However, some posters on GR’s thread managed to see the bright side of the changes. Mr_awol said they were quite happy with the changes. “Yes it's easy/profitable work generally but I really don't care for the contractor market and am more than happy for it to be shut down. Many of my more dislikeable clients are contractors,” they said.

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By Rgab1947
09th Oct 2019 10:08

Banks must take a whiter than white stance. Don't make me laugh.

HSBC in USA (Mexican drug lords, in Europe Swiss bank money hiding), Barclay's executives in Court, Dankse Bank £billion money laundering etc. etc. Then the PPI saga.

Then "take a permanent job (If there is an appropriate role and their skills merit it)" Yes happy to employ you as a contractor (Role and skill certainly come into play) but not as an employee as maybe your skill not good enough or there is no job.

Flawed legislation, obstinate enforcement, riding roughshod over contract law.

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Replying to Rgab1947:
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By GR
09th Oct 2019 15:23

Rgab1947 wrote:

Banks must take a whiter than white stance. Don't make me laugh.

HSBC in USA (Mexican drug lords, in Europe Swiss bank money hiding), Barclay's executives in Court, Dankse Bank £billion money laundering etc. etc. Then the PPI saga.

Then "take a permanent job (If there is an appropriate role and their skills merit it)" Yes happy to employ you as a contractor (Role and skill certainly come into play) but not as an employee as maybe your skill not good enough or there is no job.

Flawed legislation, obstinate enforcement, riding roughshod over contract law.

Like you say, this has nothing to do with banks trying to be whiter than white. The banks can't be bothered to assess thousands of contractors every six months and having to deal with thousands of contractors appealing their IR35 status and going to employment tribunals, etc. The banks (e.g. HSBC, Barclays, Lloyds, Morgan Stanley, M&G Investments, etc) position makes perfect commercial sense. Plus the banks and other financial service institutions generally can't reclaim the VAT that the contractor charges and therefore putting the contractor onto PAYE saves them from having to pay VAT.

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By johnjenkins
09th Oct 2019 10:19

IR35 is simple to defeat. A watertight "contract for services" strictly adhered to. Job done. Banks have always panicked, always panic and will always panic, when they think there is a few bob to be made. It's called "saving bottoms".

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Replying to johnjenkins:
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By GR
09th Oct 2019 15:29

When push comes to shove it looks like the banks can't be bothered to individually assess thousands of contractors every 6 months. You can't blame them, it is a big undertaking. HMRC have banned blanket outside IR35 assessments. It looks like the banks are unwilling to hand over the control and substitution clauses necessary to create outside of IR35 roles. The banks want people that they can fully control as the information they hold is so sensitive. The banks may even save some money on this PAYE exercise as they will no longer need to pay the VAT that the contractor charges when they put the contractor onto PAYE.

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By philaccountant
09th Oct 2019 11:09

UK governments spend the best part of four decades deregulating the labour market to make it more "flexible". It then suddenly realises the tax take is down and throws all those people it's duped into its wonderful "flexible" market that it's created under the bus.

The government shall have its cake and it shall eat it.

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By NeilW
09th Oct 2019 11:09

Contractors are the scarce resource. All that happens is the price rises to cover the tax the banks voluntarily want to pay.

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Replying to NeilW:
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By GR
09th Oct 2019 15:37

In my humble opinion, I believe contractors are not a scare resource. I believe they are generally a flexible resource. They just come in when the bank requires a bit of extra help on a project but do not have enough staff. They are a bit like locum doctors or temporary agency workers. Given that loads of contractors will be losing their jobs in the next few months there will be plenty (around 100,000) looking for work. These 100,000 contractors may not even be able to secure work due to the uncertain political/economic climate.

As for salary rise, although this may happen because the banks won't need to pay 20% VAT anymore. I don't think the salary rise will be that large because the banks will need to pay 13.8% employer's NI and 0.5% apprentice levy on top of the salary. In addition, due to the uncertain political/economic climate the banks may decide to scale back their plans and therefore they could end up being a lot of unemployed contractors come April 2020 competing for fewer and fewer PAYE roles (which would drive wages down).

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By avalon111
09th Oct 2019 11:15

This is poor thinking from the respective Human Resources Directors.

Switching contractors to PAYE/umbrella isn’t feasible because determining that the contractors were inside IR35 will invite a retrospective investigation from HMRC. That threat will ensure the contractor walks/takes a sabbatical/retires/finds an ‘outside’ role elsewhere...

Whatever the solution, Barclays and Lloyds will be deprived of the contractors, and their skills, and will never be able to engage them again for the same role.

That’s a big hit for both Banks to take, caused by a lack of critical thinking by their HR leads.

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Replying to avalon111:
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By dgilmour51
09th Oct 2019 12:01

avalon111 wrote:

This is poor thinking from the respective Human Resources Directors.

HR departments have never been much use beyond running fanciful raft-building 'team' exercises.
Seems they're even making AI do interviews now - in implicit recognition of their vacuousness.
Any thing as complex as to require a modicum if commercial thinking as opposed to pseudo-psychological twaddle is way outwith their world-view.
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Replying to avalon111:
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By GR
09th Oct 2019 15:43

Why would the HR directors care if the contractor gets investigated retrospectively? If the contractor gets investigated retrospectively then its the contractor's problem not the employer's problem.

Many of the banks are looking to employ contractors via PAYE once they get them to stop using their Ltd companies in February 2020.

You can't blame the banks for wanting to avoid having to do thousands of individual status determinations every 6 months, having to deal with thousands of appeals, employment tribunals, etc. Its a waste of their time and money. The banks will also save on VAT by employing the contractors via PAYE (as currently the banks have to pay VAT that the contractors charge via their ltd companies).

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By AndrewV12
09th Oct 2019 12:21

Banks seem to talk a lot about complying with rules, and then go on to break every rule going, interesting to see how this one pans out.

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By Tom 7000
09th Oct 2019 12:40

Q25 8 Marks

Brexits coming down the train line from one end of the tunnel.
This is coming from the other end

You are standing spot in the middle.

Discuss the strategy you will implement to deal with the train crash?

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Replying to Tom 7000:
By ireallyshouldknowthisbut
09th Oct 2019 16:49

Blame everyone else for your predicament.

It seems to work for Brexiteers.

Although from a business perspective instead of trying to blame everyone else for the sudden increase in my time for dossing off on here, I have just written my first paid for print advert for about 6 years, and will be sprucing up the old website once SA season is done.

Even that has been slower than normal, got a lot more left than this time last year. I thought it was just the weather being nice, but maybe people are feeling skint.

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By adam.arca
09th Oct 2019 13:38

IR35 is a classic case of the law of unintended consequences.

Early 2000s, introduce a politically-driven tax measure which flies in the face of human nature and the modern economy.

Subsequently: act surprised that this measure hasn't worked; instead of bowing to the inevitable, however, box yourself more and more into the corner by gradually introducing tighter and tighter regulations.

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By adam.arca
09th Oct 2019 13:51

What is really needed, however, (and as many people have already said on many occasions) is a proper review of modern working life and an attempt to more clearly define the borders between full employment / gig economy / genuine self employment. Instead, what we get is the usual sticking plaster approach where yet more towers / wings / battlements are added to a crumbling edifice which doesn't even have stable foundations to begin with.

There is a certain American bank on a business park near me which is notorious locally as a hire and fire merchant which only "employs" people via PSCs. And I mean just about everybody who works there. And by the sounds of it they aren't alone in this practice.

It is in my opinion rampant abuse of this Pimlico Plumbers sort which needs tackling rather than the contractors themselves: I would agree that many contractors appear decidedly unpleasant but you really can't blame anyone for looking to maximise their takehome pay and (again in my opinion at least) it all contributes to the greater good of the economy.

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By tonyaustin
09th Oct 2019 15:10

This is really all because net income of directors / shareholders is higher if they take dividends instead of paying themselves a salary commensurate with the work they do. Once upon a time, some 40 odd years ago, investment income was taxed at a surcharge of 15% higher than the rate applied to earned income!

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By GR
09th Oct 2019 15:18

I wonder how all the big contractor firms, e.g. Crunch, SJD, Clearsky, JSA, Maslins, etc are going to cope post 6 April 2020? Surely these firms are just going to end up like Thomas Cook? E.g. they will lose around 20%+ of their clients, then potentially run out of cash! Looking at JSA Services Ltd's group accounts they made a £1.1M loss in 2018 (and £250k loss in 2017) and that is before the new off payroll rules come into effect! Surely these types of firms are just going to go under? Hopefully this results in more clients for the rest of us!

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Replying to GR:
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By djn
09th Oct 2019 16:00

GR wrote:

I wonder how all the big contractor firms, e.g. Crunch, SJD, Clearsky, JSA, Maslins, etc are going to cope post 6 April 2020? Surely these firms are just going to end up like Thomas Cook? E.g. they will lose around 20%+ of their clients, then potentially run out of cash! Looking at JSA Services Ltd's group accounts they made a £1.1M loss in 2018 (and £250k loss in 2017) and that is before the new off payroll rules come into effect! Surely these types of firms are just going to go under? Hopefully this results in more clients for the rest of us!


I was thinking exactly the same. Looks like sjd sold up at the right time.
They must have known this was coming so cashed in just in time.
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Replying to djn:
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By GR
09th Oct 2019 16:38

There has been a enormous number of contractor accountancy firms selling up to the likes of Clearsky (backed by Optionis), JSA (backed by universal partners) and Brooksons (backed by The Riverside Company) in the last 5 years. These 3 super contractor firms (backed by private equity partners) alone own at least another 20 contractor accountancy firms because these 20 contractor accountancy firms (including SJD) have cashed out knowing that their business value is diminishing fast. These 3 private equity backed super-contractor accountancy firms (clearsky, brooksons and jsa) all appear to be racing with each other to see who will get an IPO so that the private equity companies get their investment back. I fear that these private equity companies are going to lose a lot of money because they have valued these contractor firms pre-off payroll rules! A financial disaster waiting to happen in my opinion.

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Replying to GR:
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By Tom 7000
09th Oct 2019 16:02

Only 20%... I would have thought more like 75/80

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Replying to Tom 7000:
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By GR
09th Oct 2019 16:45

Can you imagine if these huge contractor accountancy firms lost 75% of their client base. For sure they would go bankrupt and for sure there would be a lot if unemployed accountants.

I reckon at least 20% of contractors will be lost. This could easily increase to 30%. A 75% closure rate would be an absolute disaster for the industry. Especially for firms like Clearsky, Brooksons and JSA who own around another 20 contractor accountancy firms. I can't believe these firms are purchasing other contractor firms (unless they are getting a really good price).

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Replying to GR:
By ireallyshouldknowthisbut
09th Oct 2019 16:54

By definition the ones using JSA and the like tend to be "pure" contractors.

We tend to attract people who are more likely to be "proper businesses", so I wont lose as many.

Id suggest it would be more like a 75% loss myself, and if so the gov is hardly likely to pull the brakes on this for another 12 months as the treasury is going to be really broke in 12-18 months time if the god like geniuses in no.10 get their way.

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Replying to GR:
7om
By Tom 7000
09th Oct 2019 16:54

I don't think the penny's dropped here with a lot of people. 200,000+ uk limited companies will close. Assuming each accountant does 70 a year. That's 3000 unemployed accountants. 1000+ unemployed support staff. Most firms will lay some people off as they are likely to lose 10-20% of clients and ride out the storm or retire. There will be lots of firms for sale and downward pressure on wages for new staff hires.

Have your acquisition fund ready....

If you are a director/shareholder of one of the big contractors, you are toast. Theres no way you can plug an 80% fall in revenue

If you are an insolvency practitioner and like doing members voluntary liquidations you are going to be swamped, put your prices up ( supply and demand) and order the Bentley...

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Replying to Tom 7000:
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By djn
09th Oct 2019 17:44

Tom 7000 wrote:

I don't think the penny's dropped here with a lot of people. 200,000+ uk limited companies will close. Assuming each accountant does 70 a year. That's 3000 unemployed accountants. 1000+ unemployed support staff. Most firms will lay some people off as they are likely to ..


How on earth to you extrapolate those figures?
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Replying to Tom 7000:
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By GR
10th Oct 2019 06:47

To be honest, in many contractor accountancy firms the client ratio is around 1 accountant to 200 contractor clients. If say 100k (i.e. 20%) clients close then 500 senior/semi-senior accountants will lose their jobs. In addition, these senior / semi-senior accountants are normally supported by junior accountants and therefore another 500 jobs will go there too. So, theoretically, a 1,000 accountancy jobs will be lost by the end of next year. That is a lot of unemployed accountants.

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Replying to Tom 7000:
By SteLacca
10th Oct 2019 09:51

That's not how the contractor accountancy firms work (certainly not Brooksons - I used to work there). There accounts and SATR prep is largely automated. The contractor punches their invoices and expenses into a web portal, and the backend spits out accounts and SATR, which are then reviewed and corrected on an accounts and tax conveyor belt.

There are far fewer actual people working there on accounts and tax than you would think.

By far, the largest team was actually customer services, who were basically a call centre staffed by and large by young adults who may or may not be interested in training up.

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By Accountant A
09th Oct 2019 16:03

I know directly of a good number of people working for one of these banks who were quite clearly employees being incorrectly treated as self-employed. They worked in the same office doing the same thing as other people who were employees and in some cases did that for years and years.

Anecdotally, there were thousands of similar cases.

I think it was probably a response to some director who had a large bonus riding on (staff) headcount reduction.

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Replying to Accountant A:
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By djn
09th Oct 2019 17:47

Accountant A wrote:

I know directly of a good number of people working for one of these banks who were quite clearly employees being incorrectly treated as self-employed. They worked in the same office doing the same thing as other people who were employees and in some cases did that for years and years.

Anecdotally, there were thousands of similar cases.

I think it was probably a response to some director who had a large bonus riding on (staff) headcount reduction.


I agree here
. Barclays and Lloyd's are perfect examples. My brother contracted to these at a rate of 450 per day when the permanent position would be paid maybe 50k a year. Most guys were contractors who had worked there for years. Never should have been contractors.
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Replying to djn:
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By dgilmour51
10th Oct 2019 10:46

djn wrote:

My brother contracted to these at a rate of 450 per day when the permanent position would be paid maybe 50k a year. [/p]

Indeed you have a point . . . but in such organizations, what is the cost of a £50k/annum employee? I have yet to see any proper calculations on that.
Equally I have never seen a full calculation of 'contractor cost', including all the insurances [PL,ProfL, ni, empni, health ins, pensions, shelf-time and other etc.] costs on which the putative £450/day are frittered.
Personally, I don't think there's a lot in it.
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