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UK defence sector hit hard by Off-Payroll Tax

Please note: The names of sources, their defence sector clients, and finer details pertaining to engagements have been withheld to preserve the anonymity of contributors.

The UK’s defence sector is suffering as a result of the draconian Off-Payroll Tax and the failure by many industry-leading firms to oblige by their compliance requirements.

This is according to numerous accounts shared with ContractorCalculator by highly skilled contingent workers within the sector, illustrating the damaging impact of the legislation on mission-critical projects designed to protect the UK public from global threats.

  • Highly skilled contractors vote with their feet in response to blanket assessments
  • Clients risk industry ‘brain drain’ with contractor skills in scarce supply
  • Project delays and heightened costs place crucial defence projects in danger
  • Remote clients to suffer intensified recruitment and retainment struggles

“For this level of disruption to affect a single defence supplier is a disaster for the country, but for it to affect all is a catastrophe the likes of which I have not seen in my professional career,” comments one contractor. “Adding the commercial sector to this can only lead to very dark days for UK Plc.”

Defence sector contractors blighted by blanket assessments

As is the case across the private sector, non-compliant blanket approaches are rife throughout the defence sector. A contractor with exposure to numerous defence companies operating in the south-west of the UK identified a number of firms who have allegedly taken blanket approaches due to tax risk concerns.

Another contractor working for a civil aerospace company informs ContractorCalculator that they have been presented with the option to transfer to a Pay As You Earn (PAYE) arrangement or an umbrella company, with no uplift in rate offered. Instead the firms are actively trying to reduce rates and pass on their own new tax liabilities to the workers.

Meanwhile, a contractor operating in the nuclear and aerospace industries noted that the risk of potential IR35 liabilities had encouraged their client to blanket assess all limited company contractors as ‘inside IR35’, adding:

“The implication is that if I choose to continue to service my client, I will have to contract through an umbrella organisation with my liability increasing to paying the umbrella/payroll fees plus the additional IR35 fees and income tax implications.The contract company are not willing to renegotiate our agreed fee schedule to accommodate the increase in costs, so they will fall to me, personally.”

Assessments conducted using HMRC’s Check Employment Status for Tax (CEST) tool have yielded similar outcomes, with a contractor working for a leading defence, aerospace and security company stating: “The feedback I’m hearing is around 1,000 have been assessed using CEST and over 90% have been found inside.”

Another contractor adds: “Our status determinations were ushered in by a generic email advising all contractors they had been found 'within scope' of the legislation, followed a day later by hastily-prepared role-based determinations, as per the timestamp on the CEST tool output. In reality, these were thinly-veiled blanket determinations.”

Contractor exodus impacts defence projects

The inevitable outcome is diminished contract engagements, accounts of which are already widespread. “There are numbers of contractors going on the bench to sit out until the ‘outside IR35’ roles start appearing”, says one contractor.

Relaying frequently cited reasons behind decisions to leave, a contractor who recently terminated their engagement highlighted unfair assessment processes with little right of appeal, the lack of consultation by clients when making status determinations, and unlawful efforts by clients to source employer’s National Insurance Contributions (NICs) from contract rates.

Elsewhere, one contractor stated that 50% of their client’s contract workforce had resigned before the end of February, adding: “Within the industry, I expect that 80-90% of all contractors are intending to leave.Within the internally funded product development department with my current end-client, the vast majority of contractors advised they'd be forced to leave if found ‘inside IR35’, causing the end-client to cancel a three-year multi-million-pound internal development programme.”

Another contractor working on a safety case observed that some colleagues terminated their engagements immediately following a CEST assessment, with others indicating they would leave prior to 6 April.

Industry brain drain ‘could take several years to resolve’

Contracting industry stakeholders warned long ago that firms affected by the Off-Payroll Tax would suffer damage to projects and experience inflated costs attempting to rectify such, and the defence sector is no different. One contractor foresees a loss to their client of “90-95%” of contractors, threatening “large-scale cost overruns and multiple-year schedule slips”, adding:

“Recruitment of the right people typically takes 3-6 months.Time to security clear new starters often takes 3-4 months, or 6-9 months for the very highest levels. If the demand goes up to unprecedented levels in April, these estimates are highly likely to double or worse.

“I am anticipating between 18-24 months of project schedule slip as a direct consequence of the introduction of the Off-Payroll legislation across both of the programmes I’m involved with.I hear similar projections from contracting colleagues in UK electronic-warfare and UK-led missile programmes.”

The effect of efforts to prevent such delays is illustrated by a contractor operating in the south of England: “Costs are going up. A lot of contractors have been offered rate increases to persuade key people and knowledge to stay on. There are also schedule impacts being raised as knowledge and skills go from programmes - often with little notice for knowledge transfer from a contractor before they have left. My client has contacted me to ask what my intentions are and has already offered a 10% rate increase from April 6.”

However, rate increases to retain key contingent workers aren’t an option for all defence sector firms. One contractor argues that clients don’t have the budgets to ramp up rates, nor to fund their own new tax liabilities, and warns of the impact of the resulting loss of contracting talent:

“Due to security requirements, this work cannot be outsourced and will take months to obtain clearances for any potential replacement resource.Replacement of experienced safety case engineers is not possible as it does not exist.This is currently a finite resource and it will take several years for clients to recruit graduates and skill up.”

Another contingent worker illustrates the damaging impact of attempts by clients to achieve more with fewer resources: “There are pressures everywhere. Staff in pinch points that are being asked to cover multiple roles are going off on sick leave more frequently.”

Remote clients suffer intensified recruitment struggles

Struggles are intensified for defence sector clients operating in often remote locations. An ‘inside IR35’ assessment also prevents contractors from claiming crucial travel expenses, and many contingent workers observe that colleagues who travel for work have ended engagements as a result of this withdrawal.

“The majority of contractors in the defence industry are non-local, and the loss of approximately 30% take-home pay precludes the travel and subsistence costs of those living away from home,” adds one contractor.

Another contingent worker highlights the scale of the problem for their remote-based client: “There’s only another colleague and myself who live nearby. All others are at least 80 miles from the client site. This equates to around an hour and a half commute minimum.All of these guys lodge locally at least two nights per week.”

Published: 16 March 2020

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