Contractors and the UK’s flexible workforce of highly skilled knowledge workers are bearing the brunt of the government’s poorly conceived and reactive tax policy. And the lack of coherence and consideration of the impact is killing one of the major sources of the UK’s competitiveness: its flexible workforce.
The government’s tax policy impacts on contractors directly and indirectly: direct measures include the general, such as corporation and income taxes; while the specific include strengthening IR35 enforcement and the new ‘off-payroll’ and ‘controlling persons’ rules.
Indirectly, contractors’ livelihoods are totally dependent on a tax UK regime that supports business and inward investment, as most contractor clients are medium sized enterprises and corporations, with an ever-decreasing rump of public sector clients.
So, what has occurred on the tax landscape that is so bad that it is killing the UK’s flexible competitiveness?
Of key importance to contractors are the aforementioned IR35, off-payroll and controlling persons rules. Alongside the added administration burden of HMRC’s new business entity tests and guidance launched in May 2012, are three new IR35 compliance teams that have already started to significantly ramp up compliance enforcement.
Our sources estimate that will result in up to 1,800 IR35 reviews each year, dramatically increasing the risk, and hassle and expense, of an investigation. Limited company contractors are already receiving pre-investigation letters, which are being sent out by HMRC under the guise of standard employer record checks.
The government’s hastily-cobbled-together off-payroll rules are a done deal, with the potential for them to force many public sector contractors onto the payroll or out of their contracts. And although only at consultation stages, the controlling persons rules could impact on a huge number of contractors with project and project team management responsibilities, similarly forcing them onto the payroll or out of contract.
The controlling persons rules will also impact on contractors’ prospects indirectly, because contractor clients will find their flexible knowledge workers significantly more expensive, and more hassle to manage. Not only will contractors caught by the controlling persons rules and placed on the payroll incur the additional cost of employer’s National Insurance Contributions (NICs), they will also need to be paid more to cover the cost of the extra tax. It will also be the client’s responsibility to enforce the rules, adding another layer of complexity and cost – a strange outcome for a government publicly committed to reducing red tape and unnecessary bureaucracy.
Compliance and cost are major turn-offs for any business, so these new rules will mean contractors won’t be the attractive and flexible resource they once were.
Further to these specific, employment tax related factors are those that paint the UK’s fiscal regime as ‘unstable’, and therefore unattractive to large and mobile international corporations. The fallout can be significant. For example, Chancellor George Osborne’s windfall tax on energy companies in the 2011 Budget directly resulted in cancelled projects and lost contracts. Some big players in the sector are now wary of long-term inward investment because of the UK’s perceived tax instability, and are including this in the forward investment projections.
Both the direct and indirect taxation policies are a great cause for concern:
- Ultimately the impact of the direct taxation policies will drive highly skilled knowledge workers out of the country or into employment. But this is not where the UK’s economy needs them; we need a flexible and agile resource able to react quickly to market opportunities and reduce start-up and investment risks for companies and entrepreneurs. Employees can’t deliver that. Nor can expats.
- The impact of indirect tax policies will be to reduce growth and inward investment by medium sized businesses and corporations. This further reduces opportunities for contractors and could structurally damage the flexible workforce, by reducing its size and skills base. The UK’s economy needs the focused contracting mindset that enables knowledge workers to hit the ground running and deliver exactly what a project requires.
Based on what it does, rather than what it says, the government seems intent on both directly and indirectly killing off one of the UK economy’s most precious assets.
We’ve seen a number of government u-turns recently; let’s hope the government’s next u-turn is in favour contractors and contracting, for the benefit of UK plc.