BAE Systems has become the latest in a series of high profile UK companies to ban contractors from working “outside IR35”, according to reports in The Register.
With just over a month to go before the implementation of the extension of the Off-Payroll IR35 reforms into the private sector, the defence company has apparently issued its contractors with a notification that they will be treated as employed for tax purposes once the new rules kick in in April.
The email, sent out by BAE’s Indirect Procurement Team at the end of January, informs contractors that their IR35 status has been assessed using HM Revenue & Customs’ highly-criticised status checker, CEST. “Where roles are identical or almost identical, the assessments have been made against roles within job ‘groups’ rather than against the individual,” states the email – a policy that has been endorsed by HMRC.
Speaking to The Register, freelancers working at BAE said they believed that all contractors working at the defence firm will now find themselves “inside IR35”. Some believe that a “blanket” approach has been applied: a deliberate attempt to force all contractors onto payroll, regardless of their actual working terms & conditions.
“Everyone is inside. I don’t know anybody that’s been told they’re outside. I’ve spoken to all my colleagues and nobody is aware of a single case”, said one BAE contractor.
Another said their contract was terminated after they contested their “inside IR35” determination. “There was no discussion. I kicked up a fuss, and not long after, I got a call saying my contract had been terminated.”
A blanket ban is especially problematic for BAE because it often requires highly-skilled staff to work from remote locations. For example, the company has ongoing projects in Barrow and the Isle of Wight, as well as operations in many remote military bases, such as the RAF base in Lossiemouth in Scotland.
For many contractors, working in such remote locations is only cost-effective if they can claim the cost of travel and accommodation as tax-free expenses. Moving onto PAYE would make such expenses unclaimable, due to the more stringent rules surrounding employee expense claims.
As a consequence, being forced onto payroll has made many BAE contractors seriously consider leaving even before the IR35 reforms kick in.
“As soon as I got the note saying I’m inside, I started chasing another role,” said one contractor who commutes to a remote BAE location. “There’s no way I could afford to be on IR35 and still come here. I pay a significant chunk of expenses to work on this project. They would have to up my rate by 30 per cent plus to keep me on.”
“I liked my job, that’s why I put up with the commute,” another contractor told The Register. “An hour and a half in, and an hour and a half back. But they were trying to put me into a situation where I would have had no employment rights and would have been a third worse off. If I was going to be a permie, I would have picked somewhere closer to home.”
Both sources said the reforms could seriously impact ongoing projects. “There is a very real risk that some key people will walk out,” one said. “It’s not like they’re going to be on breadlines, but it won’t be lucrative enough for them anymore. I know several teams in BAE who are worried that large chunks of their teams will soon be disappearing.”
BAE joins a long list of major UK hirers of freelance staff – including Barclays, HSBC, RBS and Vodafone – that have either said they will stop hiring contractors altogether post-April, or will subsequently force all contractors on to PAYE, either via the company payroll, or via umbrella companies. BAE have said they will continue to work with limited company contractors, but only if they operate “inside IR35”.
A BAE Systems spokesperson said: “the IR35 legislation does not change how we contract individuals, and we will continue to engage contractors through agencies and personal service companies.
We are implementing new processes and procedures to ensure the business is ready to meet the legislative obligations of the new IR35 rules. All IR35 assessments are conducted in a consistent manner using HMRC’s tool.
James Poyser, chief executive of contractor accountancy firm Inni Accounts, said: “As awful as PSC [Personal Service Company] bans are from the banks, at least people know exactly where they stand and they can make the decisions and move on.
The problem with these blanket assessments is that companies might well be trying to do the right thing, but they’re not going about it the right way. They are overwhelmed by the regulation and panicking.
The implementation of the Off-Payroll rules is currently under a Treasury review, with the outcome expected imminently. The Lords’ Economic Affairs Committee has also launched a separate inquiry into the reforms.
26th February 2020.