Vodafone Group plc has become the latest major UK company to cease hiring limited company contractors, in a decision revealed this week.
The telecoms giant joins major financial services firms such as HSBC, Morgan Stanley and the Royal Bank of Scotland in the move, ostensibly driven by changes to the IR35 rules that are due to take effect next April.
The Off-Payroll IR35 reforms will make the hirers of contractors responsible for determining whether their freelancers should be taxed on an employed or self-employed basis – however, as many contractors are aware, the distinction can be a difficult one to make.
End-clients who erroneously decide that their contractors qualify to pay lower, self-employed taxation run the risk of being stung for any unpaid tax and National Insurance, making the prospect of hiring contractors an altogether riskier and more complex one with Off-Payroll IR35 reforms.
Thus, several companies have decided to avoid limited companies altogether and instead insist that their contractors get taxed under PAYE through the company payroll or operate via a PAYE umbrella company. For genuine freelancers, who are used to the substantial tax benefits of working through a limited company, IR35 represents a significant cut in net pay.
However, companies that operate “blanket” inside IR35 policies may find that they struggle to hire the best talent. Vodafone apparently stopped hiring limited company contractors from December 1st.
In the same week, HSBC told its remaining contractors that not only would they be moved onto PAYE, but they would be subject to a 25 per cent rate cut, presumably to cover the additional administrative costs and National Insurance liability involved in payrolling employees.
The companies’ policies may end up being revised however, given that chancellor of the exchequer Sajid Javid committed on Saturday to review the unpopular Off-Payroll IR35 policy. This means that the Conservatives have joined Labour, the Liberal Democrats, the SNP and the Green Party in committing to review Off-Payroll, making a review almost certain following the general election. It is unclear whether the Tories would halt the implementation of the new IR35 rules during such a review, as the other parties have pledged to do.
Upon hearing the news of Vodafone’s new stance, IR35 expert Kate Cottrell warned contractors that have previously been operating “outside IR35” that moving to PAYE under the same terms and conditions could open up an avenue of attack for a future IR35 audit from HM Revenue & Customs:
“Regardless of HMRC’s woolly assurance of no targeted retrospection, being placed on PAYE – although not an admission by the client that IR35 actually applies – for the exact same role a contractor has previously treated, as outside IR35 definitely presents a high risk”, said Ms Cottrell.
“It’ll be especially high risk if they have no evidence to support that their decision was taken with ‘reasonable care.’
“So contractors really can’t afford to wait and see what their clients are going to do about the new rules. The first action is to establish what their incomes are likely to be, and the impact of any retrospective claims by HMRC.”
Referring to the new client policies, the status expert continued: “Blanket change or leave statements do not get projects delivered where there is a need for the skills and talent to deliver them.
“This is in fact a short-term fix, as we saw with the public sector off-payroll rules.
“A key issue will be knowledge transfer and let’s hope those same organisations have got in place some stringent risk policies for managing their projects post-implementation of their changed approach.
“We will have to wait and see if those in the [telecomms] industry adopt similar policies. I fully expect that just like the banks, not all [telcos] will follow the same routes and this will give rise to opportunities to attract and keep talent or skills for those that do not.”
Seb Maley, chief executive officer of contractor insurance firm Qdos Contractor is also confident that not all telecommunications firms will follow suit: “If Vodafone leaves contractors with no option but to work via an umbrella, that isn’t to say this approach will be representative of the entire telecoms industry come April 2020 – as you might argue it looks to be in the banking sector,” he said.
“HSBC’s IR35-and-pay-cut ultimatum to contractors is another example of a private sector firm taking a needless and risk-averse approach to incoming changes. Unfortunately, it looks as though several other banks are to follow suit, initially at least.”
A spokesman for Vodafone said:
“As with all large organisations in the private sector, we are implementing IR35 in order to comply with the new legislation.”
A spokesman for HSBC said: “We value our contingent colleagues’ contribution to HSBC, and we are working to best to optimise our workforce profile in line with our business requirements into 2020.”
3rd December 2019.