In 2020, we witnessed many companies announce blanket bans on limited companies. Contractors had their contracts terminated, and then were re-engaged and forced to work via an agent’s PAYE scheme, or via an umbrella company. We expect to see this again, but to a lesser degree as we approach April 2021.
Why did they apply blanket bans?
In our conversations with contractors and employers, we saw four main drivers for blanket bans:
- The effort involved to assess contractors & consultants individually (some companies have over 5,000 contractors). Companies also need to be prepared for a barrage of appeals from contractors. There’s a lack of skilled resource to undertake this work
- Pressure from HMRC (as for GSK)
- A strategic shakedown of the contingent workforce: an opportunity to bring some resource into permanent roles (at a lower rate); an opportunity to justify the business case for accelerating offshoring of work
- Risk-averse boards who would rather overpay tax than risk getting caught underpaying – but perhaps this one’s tenuous!
It’s a replay of the public sector
The same thing happened in the public sector in 2017. We saw blanket bans from a number of organisations (including TfL) who witnessed an exodus of skilled workers, and soon realised they needed to assess each individual on a case by case basis. If you search job boards today for “outside IR35” roles, you’ll find a healthy selection in public sector organisations – and indeed many of our clients continue to work outside IR35 in the public sector.
Blanket bans won’t last in the long term
Economics can help us to understand blanket bans.
Companies can gain a competitive advantage from recruiting the best contractors and consultants. I’m sure we’ve all witnessed this. We see familiar power-house contractors and consultants popping up again and again on high profile projects across multiple clients. They are the ladies and gents who deliver, every time.
Over the last 10 years of talking with our contractor clients (who all have the hallmarks of power-houses), it’s clear that many have a small pool of clients (3-4 seems typical), which they rotate around – perhaps bound by geography, niche skill or just contacts. If you’re in this situation, and all of your regular clients have blanket bans apart from one, which one would you consider for your next move?
And this is why blanket bans cannot be sustained across the patch. The skills that high-impact consultants and contractors bring are valued well beyond their daily rates. We’ve spoken to a few contractors recently who remarked that their clients are working really hard to get IR35 right, as they needed the best contractors to deliver their growth plans. This is not uncommon.
The demand for the best contractors, even with the current Covid market, still outstrips supply by some magnitude. If you’re in this category then have confidence in the value of your skills and push to ensure that clients are assessing your contract on an individual basis. Negotiate the terms to make it work for you.
But there are places where blanket bans will stick: lower-value, less skilled roles – typically those performed by less experienced contractors, and roles which feel more like ‘cover employees’ – an interim team manager providing mat cover, for example. In this part of the market, new contractors can enter relatively freely and quickly, and supply and demand are much more closely aligned.
We’ll end up with a two-tier market
In the medium term, we’re likely to arrive at a two-tier market.
This will include roles that are inside IR35 and offered on a PAYE/umbrella only basis. These will be high volume, lower value roles. The economics won’t stack up to assess every single role on a case by case basis. There is also an over-supply of individuals for these roles due to Covid, further cementing their position inside IR35.
The second tier will be higher-value contracts, offered to experienced contractors and consultants, mostly outside IR35. These contracts are essential to allow companies to deliver on their objectives, and they will allocate resource to assess them individually to ensure they can get the best minds on board.
As a case in point, we recently chatted to a consultant working for one of the large banks with a blanket ban. They seemed very relaxed: “They’ve got form: that’s what they’ll say publicly, but behind closed doors they’ll be doing deals with the key talent they need to retain. And I’m confident I’ll be in that room.”
But be prepared for some turbulence
In the meantime, however, do be prepared for some turbulence. Quite simply, companies are stretched. They’re dealing with this, Covid, a downturn and Brexit. They may not have the resources to conduct individual assessments of 400,000 contractors and consultants who are using limited companies today. Given how new the off-payroll rules are, there’s going to be a shortage of people out there who have the knowledge to conduct the assessments. The short term holding pattern for companies who can’t assess everyone is likely to be blanket PAYE/umbrellas – a low-risk tax parking lot.