Limited company contractors won’t be disappearing anytime soon, whatever the outcome of HMRC’s consultation on the application of IR35 in the public sector. The drivers of flexible working are growing - even more so following the decision to leave the European Union (EU). And there have always been many more reasons for contractors to incorporate other than tax.
What will change will be how limited company contractors negotiate with their public sector clients. Currently, the existing IR35 rules require contractors to self-assess and then decide whether to apply the rules. The taxman is proposing that public sector clients become responsible for IR35 compliance.
IR35 is highly complex and dependent on employment legislation and case law. It takes an expert to apply correctly and a contractor’s ultimate employment – and therefore IR35 – status may only be confirmed after a lengthy HMRC investigation and tax tribunal. Due to this uncertainty, if risk averse public sector clients or their agencies default to deciding that all contractors are inside IR35, this leaves contractors paying considerably more tax.
The result will be either a brain drain from the public sector when, if Brexit causes immigration rules to tighten, contractor skills will be in even greater demand. Or contractors will insist on a rate premium for public sector contracts costing the taxpayer dearly. Or probably both.
Yet, the demand for contractors has never been higher. Multiple surveys repeatedly confirm contractor numbers are growing. This is driven by a combination of demand from client organisations in the private and public sectors seeking more flexible talent solutions combined with the changing aspirations of the UK’s highly skilled knowledge workers.
IT, financial and construction professionals, engineers, interim executives, knowledge workers in marketing and media, healthcare workers and a huge range of highly skilled individuals have chosen to take control over their careers. For most, this does not include employment and attempts to legislate workers back into industrial age Pay As You Earn (PAYE) long-term employment models using tools such as IR35 are failing.
Alongside offering their skills on a flexible basis, knowledge workers want to trade on a flexible basis. They want control over the cash in their business, to ring fence personal assets from business assets and, for some, the opportunities to grow and build a brand and business beyond themselves.
Incorporation is the only trading vehicle that offers this flexibility. Limited companies enable contractors to decide when they can take a salary and profits from the business. Crucially, contractors can protect themselves and their personal assets from predatory clients because a limited company is a separate legal entity, unlike a sole tradership or partnership.
Clients are not going to stop demanding contingent workers and contractors are not going to stop contracting and go back to being employees just because the Government decides to step back into twentieth century ways of working.
Equally, contractors will continue to choose the trading solution that is best for their business. If that’s a limited company then the Government will struggle to legislate against this without causing serious economic harm at a time when everyone in the UK economy needs to be working together.
So, although it may damage public sector service delivery and cost the taxpayer more, HMRC’s proposed public sector IR35 framework won’t fundamentally change contractors and how they work – limited companies are here to stay.