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Contracting in 2016: experts share their predictions for contractors in the New Year

Contractors can look ahead to 2016 with anticipation as the continued growth of the core contracting sectors, coupled with rising demand triggered by Government projects, looks set to lead to a prosperous year for contingent workers.

New contractor-impacting tax measures announced during 2015 will do little to deter current and aspiring contractors from engaging in a working arrangement which a growing body of evidence shows is becoming increasingly popular.

Contractors don’t have to worry about amendments to IR35 over the course of the 2016/17 tax year, but can expect another consultation at some point in the future.

Meanwhile, the IT and finance sectors are looking particularly favourable for contractors going into the New Year, whilst major infrastructure and building projects should play into the hands of contractors in engineering and construction.

Contracting sector to continue growth trend

“We currently have 4.6m self-employed people in the UK, of which the independent professionals make up 1.9m,” explains Simon McVicker, director of policy at the Association of Independent Professionals and the Self Employed (IPSE).

“Both of these categories are benefitting from an upward growth trend. Other areas of the economy are less certain. For example, construction is very up and down. But overall, I expect to see significant continued growth in self-employment.”

Freelancer and Contractor Services Association (FCSA) CEO Julia Kermode identifies the ongoing cross-sector skills shortages as another factor that will likely see contractor numbers rise as a result of increasing demand, but raises concerns that changes to travel and subsistence tax relief could hold the contracting sector back.

“Contractors are going to lose money in real terms unless assignment rates go up. Whether or not this happens remains to be seen. I anticipate that they will do in certain cases where contractor demand is high enough, but not across the board.”

New tax legislation has little bearing on contracting viability

Whilst changes to travel and subsistence relief isn’t expected to impact a great deal of contractors, CMME's Taj Kang identifies the changes made to limited company contractor’s income tax and dividends as the most significant incoming legislative change.

However, as Kang highlights, contracting remains a more advantageous proposition than permanent employment for the overwhelming majority of current contractors, for reasons more than just tax efficiency: “If you have the right skillset, and you work in the right sector you will still outstrip the equivalent permanent salary that you would get.”

“If you look at the freelance business model, the focus is largely on freedom, making the most of your skills and charging a premium because you’re not paid every single day 100% of the time,” adds James Abbott, founder and head of tax at contractor accountant Abbott Moore. “So the new tax measures have taken the shine off it a bit, but I don’t think anybody is going to be deterred from contracting as a result.”

Kermode agrees: “I still genuinely believe that the benefits of choosing to work flexibly far outweigh any of the deterrents which have come as a result of the new financial constraints we’re facing now. Being able to choose where, when and how you work will still be very appealing for people.”

No jumping ship expected as a result of tax changes

The biggest stories for contractors in 2015 came courtesy of the Summer Budget and the Autumn Statement. The Chancellor announced reforms to the tax that limited company contractors pay on dividends.

Umbrella company contractors and personal service company (PSC) contractors caught by IR35 recently received confirmation that they would be losing tax relief on travel and subsistence expenses. Meanwhile, the wider contracting community awaits the outcome of a wider HMRC review into travel and subsistence costs.

Whilst things may not appear quite as attractive for the contractor workforce, compared with this time last year, our experts don’t expect mass migration from the sector anytime soon.

“I don’t think we can say that there will be a wholesale movement from one to the other because hopefully individuals will think about it and make that decision for themselves, and what’s right for one person might not be right for another,” highlights Kermode.

“There’s no doubt that the dividend tax will affect some of our members,” adds McVicker. “But to be honest I don’t think it will have a huge impact. If you compare it with IR35, what they were proposing with IR35 would have been disastrous. People are going to be able to live with the dividend tax.”

Aggressive umbrella providers may face uphill task

However, whilst the consensus is largely that the limited company arrangement will maintain its popularity, Abbott points towards HMRC’s increased governance of tax avoidance over the past twelve months as a potential deterrent from engaging with riskier umbrella companies.

“Umbrella contractors tend to fall into two camps. The first group feel that they will be caught by IR35 anyway, for whom it’s a very low-admin way of working. Then there are the others who think it’s a good way to claim tax relief on travel and subsistence,” Abbott explains.

“There are some really good umbrella companies out there, but the Rangers case and HMRC’s use of Accelerated Payment Notices (APNs) over the past year are just two examples which go to show that taking risks with tax avoidance is becoming increasingly dangerous. As a result, I think we might see a bit of a migration away from high risk umbrellas.”

IR35 significance is waning following introduction of other tax measures

Contractors have received confirmation that no legislative changes will be made to IR35 until April 2017 at the very earliest. Following the worrying build-up to the Autumn Statement where concern about changes was fuelled by media reports, the ultimate confirmation that HMRC is set to take a more considered approach has been well received.

“I think that not rushing IR35 reform could prove to be a very positive signal that HMRC is getting the message, and hopefully we will see less changes thrown at us over the coming year,” highlights Kermode.

“I’m hoping this means that there will be a considered consultation process. I’m still expecting there to be a consultation about IR35 next year and I’m hoping that it’s a genuine move from HMRC to really engage and attempt to resolve this in a properly considered way that doesn’t disadvantage contractors too much.”

However, for Kang, the improved yield that the Government is set to gather from contractors due to other taxation is a significant contributor to IR35’s fall into insignificance:

“Personally, I think it’s losing its significance, even as a conversation topic. If you look at all of the changes being made to the taxation of contractors, it shows that the Government has found a much easier way to draw tax from contractors than IR35, which, to be honest, is long-winded and difficult to prove a case to claw back the revenue for HMRC.”

IR35 liability far from concluded

HMRC may have confirmed that the 2016/17 tax year is to remain free from further IR35 meddling, but the Treasury is still expected to press on with regards to exploring potential solutions.

“I don’t think there’s any change at the moment but the status quo remains,” notes McVicker. “The Government is still considering the responses, and there are some very firm opinions opposing HMRC’s proposals. I dare say that HMRC will come back with some revised proposals during 2016, and there will likely be another consultation.”

For Abbott, the notion of issuing the client with financial liability could prove central to whatever approach HMRC ultimately decides on.

“HMRC has never been comfortable with the idea of PSCs saving tax. If you look at other areas of legislation – such as Agency Workers Regulations (AWR) and managed service legislation – HMRC has tried to place financial responsibility on other entities within the chain.

“So I think there’s a good chance that HMRC will explore the potential to attach liability to the client. In the past it’s been claimed that it would be too difficult to police, but we’re in a different world now and there’s other legislation where liability has been attached to someone else in the chain.”

IT and finance sectors looking buoyant

Of all of the contracting sectors, IT and finance stand out to our experts as the two which look set to prove particularly prosperous for the contingent workforce.

“I do think that the professional sectors are doing very well at the moment, or as we call them, the iPros,” highlights McVicker. “IT is proving to be particularly buoyant, as is the finance sector.”

This outlook is seemingly shared by the contractors themselves. Abbott highlights that many of his clients – who mostly operate within finance and IT – are more confident about their prospects than they were twelve months ago.

Finance and IT aren’t the only sectors looking forward to a prosperous 2016. Contractors in plenty of other sectors can look forward to opportunities with a busy year lined up as a result of recent Government investment announced in the Autumn Statement, as Kang highlights.

“There’s a lot of investment going into infrastructure projects – HS2 being one example – which will create plenty of opportunities for engineers. Obviously there’s also a lot of upcoming building projected, which will benefit various contractors in construction.”

Kang also identifies investment in the NHS as a potential source of contracting opportunities for various sectors who feature in the supply chain, including IT, procurement, management and finance.

Potential stumbling blocks for contractors

Of all the tax measures introduced in 2015, one which looks set to impact on contractors particularly severely is the increase in stamp duty on buy-to-let properties.

From April 2016, contractors with multiple properties will have to pay a 3% surcharge on each stamp duty band for each property in a move which is set to raise £1bn for the Treasury by 2021.

“A lot of contractors will have properties that they’ve acquired over recent years, and if these properties are highly leveraged – i.e. if you have 75% of the property mortgaged by 2018 – those contractors won’t be making any money on them,” explains Kang.

“This is something that a lot of contractors need to look at,” adds Kang. “If they do have any additional cash, they may need to throw a bit more money at their buy-to-let mortgages, just to reduce the ‘loan-to-value’ threshold.”

McVicker also points towards the uncertainty over the outcome of the EU referendum as something which has created mounting concern amongst contractors, and which could have a significant impact on the contingent workforce.

“Obviously there are other international events going on concerning the Middle East and the price of oil, which have the potential to play a big part next year,” McVicker concludes.

“So there could be some unpredictable circumstances next year, but as we sit here now, it looks like 2016 should be a reasonably good year for contractors.”

Published: 04 January 2016

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