Few in the contracting community would describe 2012 as “a good year”, but among the low points there have been some highs, and certainly plenty of opportunities for contractors across most sectors.
It has certainly been a turbulent year, with HMRC being very busy on the IR35 front – though perhaps not very effective, as ContractorCalculator revealed after a Freedom of Information request. And few would have started the year predicting the unexpected attack by the Conservative-led coalition on the use by contractors of personal service limited companies (PSCs).
More positively, the work of PCG and a number of researchers have shown that the UK’s flexible workforce is increasing in size and importance to the UK economy. And this was experienced in the real world: Labour market surveys highlighted a record high in UK self-employment, while there was sustained demand for contractors across most core contracting sectors.
Here are the stories that shaped contracting in 2012:
Recognition is what public sectors contractors deserve; yet they faced a witch-hunt
In February, the story about what has become known as the ‘Ed Lester affair’ broke. The media and government expressed outrage that the then interim chief executive of the failing Student Loans Company, Ed Lester, was being paid £900 a day ‘off-payroll’. It sparked a dangerous chain reaction of inaccurate reporting by media and grandstanding by government – from the Prime Minister and Chancellor downwards. Contractors as a group were attacked for being ‘tax avoiders’, despite the recognition the flexible workforce deserves for making major contributions towards the post-2008 economic recovery and the overall health of UK plc.
‘Disguised businesses’ faced new HMRC rules on April Fool’s Day
April saw us poking fun at HMRC’s efforts to track down ‘disguised employees’ by its inconsistent and indiscriminate application of IR35. Using the concept of ‘disguised businesses’, we highlighted the absurdity of IR35 and the hoops contractors are forced to jump through to establish they are genuinely in business. The April Fool’s Day article sparked considerable debate, although we shall maintain the anonymity of those who contacted our Contractor Doctor for urgent advice about how the ‘new disguised businesses legislation’ might affect them…
Have the business entity tests resulted in ‘better administration of IR35?
The fun came to an abrupt end. In May, HMRC launched its much-anticipated new IR35 administration framework, based in part on the work of the IR35 Forum. The new business entity tests, leaked to ContractorCalculator in advance of the official launch, added a layer of arguably pointless complexity without changing the underlying IR35 legislation. HMRC also announced the creation of three specialist IR35 teams. Initial evidence about their impact (see below), and whether IR35 is indeed better administered, is inconclusive; but the avalanche of IR35 reviews predicted by some contracting service providers has failed to materialise – so far, at least.
Public sector contractors faced new ‘off-payroll’ rules
Hard on the heels of the new business entity tests, there was further bad news for contractors in May with the announcement of new ‘off-payroll’ rules to be introduced by the government. In response to the ‘Ed Lester affair’, the Treasury ordered a review into the use of Limited company contractors in the public sector. The resulting new rules, which came into force in September 2012, require contractors earning over £220 per day on contracts over six months to be able to demonstrate to their public sector clients that IR35 does not apply, or be forced onto that client’s payroll.
Autoclenz: contractors to benefit from greater clarity over employment status
In July, the Supreme Court ruling on the Autoclenz v Belcher case confirmed that HMRC could effectively disregard contracts in employment status cases, including when trying to prove a contractor was a disguised employee and inside IR35. However, employment law expert Professor Patricia Leighton told ContractorCalculator that the ruling may in fact work in favour of contractors. This is because, as a result of the Autoclenz ruling, the pressure is on clients tointroduce much tighter contractor hiring frameworks, clearly differentiating contractors from employees in the process.
Contractors were highlighted as “deserving of a voice” at policy level
PCG’s latest ‘Kingston Report’, Exploring the UK Freelance Workforce 2011, was released in July 2012. Its publication was important for two reasons. Firstly, the research showed that contractors and freelancers contribute an estimated £100bn to the UK economy, with the contracting sector having grown by 12% since 2008 to reach 1.56m workers. Secondly, it revealed a workforce with a size and composition deserving of a voice at policymaking and governmental levels. And because the methodology used to create the report was the same as PCG’s first study in 2008, it was possible to genuinely compare how the contracting sector had evolved between 2008 and 2011.
Limited company contractors branded as “staggeringly inappropriate” by MP
Jumping forward to September and October, we saw a resumption of the ‘Ed Lester affair’ fallout in the words of Public Accounts Committee chairman Margaret Hodge MP. She branded the use of personal service companies by contractors delivering services to public sector clients as “staggeringly inappropriate”. In response, commentators from inside and outside the contracting sector defended the use of limited companies by knowledge workers. “Working through a company is a perfectly sensible way of organising your affairs,” said John Whiting, tax director of the Office of Tax Simplification (OTS) and director of tax policy at the Chartered Institute of Taxation (CIOT).
Is your economy in need of some resilience? If so, just add contractors
The importance of contractors to Europe’s economic fortunes was underscored by a European Forum of Independent Professionals (EFIP) and PCG-commissioned report published in October. A key conclusion of European I-Pros: A study, by freelance economist Stéphane Rapelli, is that contractors underpin economic resilience. Those nations that experienced the most growth in contracting and freelancing are “also those generally accepted to be dealing better with the economic crisis,” highlighted PCG . The research also showed that contractor numbers across Europe have grown by 82.1% since 2000.
Contractors with an unfettered right of substitution cannot be inside IR35
A seemingly innocuous Employment Tribunal ruling on an employment status case in November represented probably the most important legal case of 2012 for contractors. UK Mail Ltd v Creasey confirmed that contractors with an unfettered right of substitution cannot possibly be employees, and therefore cannot be inside IR35. If a contractor has the right to send a substitute in their place without the approval of their client, then there is no obligation to provide personal service. This is true even if the client is able to place restrictions on who the substitute is.
IR35’s ‘better administration’ and business entity tests have led to only 193 IR reviews
We end this review of 2012 with some seasonal cheer, by revealing that, despite allegedly sending thousands of letters to contractors, HMRC has only opened 193 IR35 reviews since April 2012. This data was obtained by ContractorCalculator via a Freedom of Information (FOI) request, which also showed that HMRC closed 34 IR35 reviews because it found “no IR35 liability”. Although this represents a marked increase in the number of cases compared to 2011-2012, the total number of investigations is still well short of the thousands of IR35 reviews forecast by some contracting sector commentators.
That’s cause for extra celebration this festive season: clearly, by using tools such as ContractorCalculator’s free Online IR35 Status Test, not to mention taking advice from contracting experts, the vast majority of contractors are working outside IR35 through limited companies or in PAYE vehicles like Umbrella companies. So, despite months of vilification as ‘tax evaders’, contactors are undoubtedly paying the tax they should.
So let’s hope that, in 2013, the government in general – and the Treasury and HMRC in particular, take note of that fact and start properly supporting the UK’s vital contracting community.
Following our regular Friday News in Brief on 21 December, we’ll be taking a festive break and resuming normal service on 2 January 2013. We wish you readers an enjoyable holiday period and a healthy, happy and prosperous new contracting year.