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Off-Payroll: Bank faces contractor exodus following limited company blanket ban

A major commercial UK bank faces a mass exodus of contractors threatening heavy disruption to crucial projects in 2020 after announcing an Off-Payroll rules inspired blanket ban on limited companies.

This is according to John Shaw – whose name has been changed, and the name of the bank omitted, to preserve his anonymity - a finance contractor currently engaged by the bank. Mr Shaw notes that the measures, which were announced to contractors in December 2019, could result in the bank losing up to a fifth of its project change workforce after his contractor colleagues decided almost unanimously to leave.

“There are 90 active contractors engaged with the bank and roughly 500 individuals working in project change capacity. Of all the contractors I’ve spoken to since the briefing we received, all but one or two have already firmly decided that they aren’t going to stick around.”

The decision by the bank to circumvent its compliance responsibilities by ceasing engagement with limited companies follows a succession of similar decisions from the likes of HSBC, Barclays and Lloyds.

Bank offers contractors unlawful umbrella arrangement

Shaw has shared with ContractorCalculator an email circulated to contractors by the bank’s recruitment agency outlining its plans in response to the Off-Payroll rules. The email states:

  • Current limited company engagements won’t be extended beyond 1 March 2020
  • Options to work via umbrella companies or agency PAYE arrangements will be discussed
  • The bank doesn’t intend to renegotiate rates with contractors changing operating models

“We were also told that employment costs would be deducted from our contract rates, leaving us to fund our own employee taxes and travel expenses out of the diminished sum,” notes Shaw.

A refusal to engage limited company contractors circumvents the Off-Payroll rules and therefore doesn’t breach the legislation. However, the deduction of employer’s National Insurance Contributions (NICs) from earnings treated as employment income breaches the Social Security Contributions and Benefits Act 1992, Schedule 1, Section 3(2)(a) of which states:

‘No secondary contributor shall be entitled to make, from earnings paid by him, any deduction in respect of his own or any other person’s secondary Class 1 contributions.’

No evidence of substance behind blanket decision

In addition to the email circulated by the recruiter contractors were invited to briefing sessions further outlining the changes. Shaw explains how he challenged the proposed employment tax deduction during one of these sessions:

“I challenged the resourcing director, but they were reluctant to engage in further dialogue. All I received was a ‘don’t shoot the messenger’ type of response. The bank basically brought a sizeable chunk of their supplier base into a room to tell them that their revenue stream was being reduced by 30-40%. They were completely unprepared to answer any of our questions. It was as if they expected not to be challenged.”

Shaw notes that the bank didn’t appear to have assessed its contingent workforce or considered measures to comply with the Off-Payroll rules, and when questioned on why they had taken the decision they had, couldn’t provide an answer of substance:

“They hadn’t conducted any cost analysis to justify the decision. It just seemed to be a case of blindly following the lead taken by other banks. They also said that, ethically, they believe everyone should pay the fair amount of tax. I have no quarrels with that statement, but it’s rank hypocrisy considering their plans for employer’s NICs.”

Blanket approach agreed following consultation with HMRC

Worryingly, the bank reportedly made its decision having consulted extensively with representatives from HMRC. Whether its decision not to engage limited companies was recommended by the taxman is unknown, but it’s becoming an increasing trend in the finance sector, where major organisations have access to a dedicated HMRC account manager.

“These individuals clearly aren’t discouraging banks from blanket assessing contractors, knowing full well that it pushes far more engagements ‘inside IR35’,” notes Shaw. “It’s completely against the spirit of IR35.”

A contracting and industry veteran of more than 20 years, Shaw puts the decisions taken by many in the sector down to a diminished appetite for risk compounded by a severe lack of trust in HMRC and its Check Employment Status for Tax (CEST) tool:

“The financial sector has had its risk appetite beaten out by the regulator over many years, so firms are already risk-averse, particularly after the financial crisis. So that cultural mindset is endemic.

“I think it’s in part a consequence of CEST being inadequate and the concern that HMRC would indiscriminately pursue engagements. If the banks are confident in the status of the working relationship they should be able to stand behind that. Unfortunately, they don’t seem willing to entertain the hassle and risk that accompanies Off-Payroll compliance.”

Distrust in HMRC fuels contractor walkout

Distrust in the taxman is also fuelling decisions on the other end of the supply chain, where Shaw’s colleagues refuse to accept ‘inside IR35’ engagements for fear that HMRC will retrospectively target their current engagement.

“The decision for everyone has been driven by a complete and utter distrust of HMRC,” says Shaw. “Nobody’s willing to take the risk of remaining with the bank in an ‘inside IR35’ position, because HMRC will inevitably view us as easy targets for investigations. Looking elsewhere, even in another ‘inside IR35’ arrangement, at least offers a degree of insurance.”

Like many of his contracting colleagues, Shaw is confident that he is outside of IR35, and has taken numerous measures to strengthen his position, including creating an audit trail and ensuring his contract is project and milestone-based. However, he doesn’t believe this will necessarily deter HMRC’s advances:

“I have no confidence or trust in HMRC, particularly with the ongoing Loan Charge fiasco and the way they seem to be relentlessly pursuing tax recovery. It’s almost obsessive with them.”

Bank projects set for new year struggles

The Off-Payroll rules couldn’t come at a worse time for the bank in question, which Shaw explains is due to undertake some crucial projects in 2020 with its contingent workforce likely to be severely reduced:

“My client has a critical portfolio next year in terms of revenue growth. I believe that if these contractors don’t extend, the bank’s delivery capability would take a massive hit and it would struggle to meet its targets. Not only this but I expect the bank will face significant cost and time overruns on what are regulatory and mandatory projects.”

Shaw acknowledges that he wouldn’t rule out ‘inside IR35’ engagements elsewhere because he wouldn’t want to let the Off-Payroll legislation compromise his company’s earning potential. However, he says he will be actively seeking ‘outside IR35’ engagements and will firmly avoid companies and agencies that attempt to offload their employment tax liability.

And whereas the finance sector trend for firms to flout their Off-Payroll compliance responsibilities is expected to result in significant repercussions for the industry come April 2020, Shaw still believes the industry will be more fortunate than most:

“Companies refusing to engage limited company contractors as a result of the Off-Payroll rules are creating a problem for themselves. But, ultimately, I think the banks will be less severely affected than most because they are in good catchment areas with high numbers of local contractors who will be unaffected by the withdrawal of travel expenses that are also a result of the Off-Payroll rules.

“Firms in other industries don’t have this advantage. A shortage of ‘outside IR35’ contracts will drastically limit the mobility of contractors, and so many clients will only have access to severely reduced resource pools come next April, unless they meet their compliance responsibilities.”

Published: 24 January 2020

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