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Is Banning Contractors The Way Forward?

Is losing your contractors worth it for the long-term?

Gradually throughout the year more and more companies have set the precedence for incoming IR35 reform by confirming that they will not be engaging with contractors regardless if they are considered outside IR35. Banks and financial companies alike all seem to be following suit.

For contractors working with RBS, Tesco Bank, Barclays, Lloyds and Morgan Stanley the future points towards being put onto the payroll before the reform is introduced on 6th April 2020. The most likely outcome for contractors being put on the payroll through an umbrella company.

These companies are reportedly giving contractors no option but being paid via PAYE to avoid IR35 reform altogether. IR35 rules do not apply to contractors working through umbrella companies nor employees. Furthermore, HMRC will not dispute engagements in which independent workers are operating inside IR35.

This cautious strategy may not pay off however and could potentially pose a greater threat to private sector firms by scrapping all outside IR35 contractors. From where we’re sitting it may be a risk not worth taking, for the following reasons…

Potential skills shortage

Most contractors would prefer to continue working independently and outside IR35, so giving contractors an ultimatum to go PAYE or leave could mean private sector businesses risk losing their highly skilled, and sometimes irreplaceable, contractors if they decide to leave the contractors no choice.

From our work with over 100 businesses and recruitment agencies we have concluded that there could potentially be tens of thousands of opportunities for contractors wanting to carry on working outside IR35 like before. We are all unsure of how big of an impact the reform will really have but it may not be all doom and gloom for those wanting to maintain higher day-rates.

Significant cost implications

If the risk of losing your superior talent isn’t enough, shifting contractors onto the company payroll is a costly process, without even considering the overall costs of employment. If businesses opt for turning their genuine contractors into employees the cost of paying employer’s National Insurance Contributions is reason enough to re-think, especially for companies with hundreds/thousands of contractors. In addition to this, the various other expenses of employees run the total up higher than you think. Office and equipment costs, sick pay, holiday pay and paid maternity or paternity leave.

For hiring organisations who depend on keeping their finest contractors may often have no choice but to offer great employment contracts. Company cars and other employee benefits are often a way of making up for the money contractors will be losing out on.

In simple terms, although independent day-rates might seem more expensive to companies, a lot of the time hiring a contractor outside IR35 tends to be cheaper.

Administrative burden

With greater costs being taken into account and also the potential skills shortage, there is then the burden of putting thousands of contractors onto the payroll. Not only that but looking after these workers in line with an employer’s HR obligations.

While private sector firms might argue that assessing each and every contractor’s IR35 status is an intimidating job, in contrast to onboarding thousands of employees, it is at least a one-off task assuming that the details of the contractor’s engagement remain the same. 

Restricted business agility

The most valuable part of using contractors is the unrivalled flexibility they provide businesses. Private sector firms can engage contractors as and when they need them with not many strings attached. This is extremely helpful in handling fluctuations in demand. The ability for firms to scale their workforce to their will should not be underestimated and employing contractors in permanent positions will eliminate that benefit.

Only time will tell as to whether these financial services firms rethink their position. There is, however, at least one thing we are confident in: that IR35 reform is manageable and Qdos are engaging with many hiring organisations looking to ensure fair assessment of their workers.

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Find out more about IR35 reform in the private sector

By:Alfie Rowley-Stone

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