The UK Tax Law Changes That Are Threatening My Livelihood: IR35

I Feel Let Down By the UK Government, and Not (Just) About Brexit

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Time for a change? (Photo by Free To Use Sounds on Unsplash)

The Internet is crowded with people lamenting the state of world politics generally. Britain is far from immune to criticism right now, and rightly so.

I’ve shared my thoughts on Brexit previously, but so much time has passed since I wrote it (and yet, so little has changed) that it may or may not still be relevant. We’re still part of the EU right now, anyway.

There’s a sense in this country right now that things are messed-up. Nothing feels stable or certain, and few seem to have any confidence in the government doing what they’re supposed to. It’s hard to take them seriously too when the UK has succumbed to the examples of the USA, North Korea and others in selecting a buffoonish-caricature as its leader.

The recent (potentially illegal) proroguing of our parliament by Boris Johnson, effectively closing the doors for 6-weeks and sending all our nominated representatives’ home, suggests that everything is going swimmingly in Britain, and our politicians don’t really need to do anything to sort the country out.

Nothing could be further from the truth.

Ask anyone who is suffering sickness and trying to access help from our over-stretched NHS. Ask those who are on the front-line of increased knife-crime on our streets, both the victims and the police force trying to combat it. Ask those trying to navigate the baffling bureaucracy of government departments, trying to access basic welfare-assistance.

There is much to be done, and yet none of it is being dealt with as Brexit dominates the agenda.

Brexit has trumped everything else, and yet nothing seems to be getting dealt with in regard to that either.

The government still seems able to progress some of its initiatives, in spite of the pervading chaos. It’s one such initiative, nearing the final stages of implementation about which I’m sharing my views today; the IR35 tax law changes that come into effect in April 2020.

This is a rant, shamelessly personal in its nature, for IR35 is set to have significant effects for me that will impact upon my ability to support my family and myself. It’s also affecting many friends and colleagues who I work with and hundreds of thousands of others who are in a similar situation as me.

What is IR35?

In simple terms, IR35 (as it’s known) is focused on tackling a sector of workers who, like me, provide their services to clients as independent contractors.

I am self-employed, I have incorporated my own company and I provide my services to clients to do a job of work for the duration that my skills are required. The client will typically take me on for a period of between three and six months at a time. I’m not employed by the client, but instead I turn up for work, bill them for the days that I work, and then pay myself out of my own company once the invoices get paid. When the project I’ve been employed to do is finished, the client will usually give me my notice (often only two weeks) and I then go and find work somewhere else.

As a contractor, I work alongside permanent employees of the client, and in many ways I’m the same as them; I might do similar work, I might attend the meetings with them and I might report into a manager too, for the duration of my project. However, in many other ways, I’m entirely different to an employee:

  • I get paid only for the days I work, based on a daily or hourly rate. I don’t get paid a fixed salary.
  • In my current client, contractors are expected to work an 8-hour day where employees only work a 7-hour day.
  • The day rate paid doesn’t reflect the money that I actually receive, and like everyone else I’m expected to comply with tax laws (which I do, to the letter), as well as to provide for every other benefit that I might want, and which a traditional employee might take for granted. This includes funding my own pension, making a provision for periods when I might be unemployed but still need to pay myself to cover living costs, and so-on.
  • I pay all my own taxes whereas permanent employees’ taxes are generally deducted at source and paid by their employer.
  • If I’m sick and don’t come to work, I don’t get paid. If I’m on holiday, I don’t get paid.
  • My contract typically only requires the client to give me two weeks’ notice if they no longer require my services. Most permanent employees can rely on at least one- or two-months’ notice
  • Every client I’ve worked for in around eight years of being a contractor has seen fit to introduce unpaid furloughs during peak holiday seasons (such as Easter, Summer and Christmas) often at short notice. At these times, all contractors are sent home unpaid for two weeks as a means of the client saving money. I’m pretty sure that permanent employees don’t have that happen.

The IR35 laws were introduced by the government to combat what they see as individuals like myself who they believe are working under the same terms and conditions as permanent employees and hence should be paying tax on the same basis as employees too. This seems to imply that the government think that contractors universally stretch or play the system and don’t pay their way. This is wrong. I (and virtually every other contractor I know) pay as much, if not more tax back to the country than I ever would as an employee (as I’ll illustrate shortly).

IR35 came into effect in April 2019 for public sector organisations, and it will come into effect in April 2020 for those of us working for private sector companies. With this law in effect, responsibility will sit with the companies that employ contractors as part of their flexible workforce, to prove there is a legitimate reason why contractors are justifiably different to employees in regard to their terms and conditions of their employment, to justify them being retained as a supplier rather than an employee.

Previously, this responsibility sat with the contractor, and most, like me, were willing and able to exist with the risk that they might be called upon to justify this to the Inland Revenue department of the UK Government. Most client organisations though, are reluctant to accept and own this risk as a means of retaining the right to employ contractors. Instead, they are moving to other models of resourcing their projects with flexible headcount, such as through the use of larger consultancies (who themselves either employ their staff direct, or who take the risk of employing contractors).

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Photo by Annie Spratt on Unsplash

IR35 will have a big effect on my life.

I had always understood that the ethos of the Conservative government, currently in power in the UK, was to encourage economic growth through enterprise and entrepreneurialism, and it was driven by this spirit that I first took the opportunity to become a contractor.

I was attracted by the flexibility and freedom it offered me in my career. I wanted to feel like I was earning an honest day’s pay for an honest day’s work, since I would be being paid for the delivery of my skills, not on the basis of a contractual obligation agreed between me and an employer. I would be able to move between clients periodically to learn new skills, and potentially in different industries. I would have the freedom to control my own destiny, and to work as and when I wanted to.

I acknowledged the inherent risks and the loss of job security, although I felt confident of being able to provide adequately for me and my family even with the inherent risk of periods without work. This has proven to be so, and I’ve been lucky to have no breaks between work other than those I’ve taken by choice.

I was admittedly also drawn by the idea of earning a daily rate of pay that seemed attractive when compared to a corresponding permanent salary. It didn’t take too long for me to learn though, that the amount of money I charged for my services didn’t correspond directly to the money I receive in my pocket, once taxes and so-on were paid. The additional money paid merely helps to offset the additional risk and the need to provide my own pension and to make provision for leaner times.

I’ve now been contracting for approaching 9 years. IR35 seems to signal the end of an era.

What now?

My current contract, aligned to my current project, finishes at the end of this year. The client has said they won’t renew or extend this, not even to the magical date of April 2020 when IR35 kicks in. They’ve also taken a further step to limit their exposure to the whims of the government; contractors can now only be employed for a maximum of 2 consecutive years with this client, which is how long I’ve been here, albeit on different projects. Staying on is not an option. I’m faced with a few options, none of which seem palatable:

  1. I could seek a contract with a new client but it would be unlikely to extend beyond April 2020, at which point nobody knows what will happen in the industry. There might be a rush as contractors’ clamour for the available permanent jobs, and as clients release their contractors and replace them with permanent employees; the work still needs to be done, right?
  2. I can take a permanent job with my current client. They’ve offered me a salary and benefits package that is generous (and gratefully appreciated) if I’ll convert to be an employee and stay with them. Many of my contractor colleagues have been given the same. We’ve been offered a salary that is commensurate with what other permanent colleagues get paid to do the same job as us.
  3. Cut my losses, quit the industry and start my second career, whatever that may be!

To cut to the punch-line, I’ve decided that the least risky option is to submit to the influence and will of my government, and accept the permanent job. I want to remain a contractor for all the reasons that drew me to it initially, but I cannot risk being out of work in 2020, unable to support myself and my family.

While generous, the offer I’ll be accepting represents a significant pay-cut in terms of the money that I’ll receive in my bank account on a monthly basis. It includes paid vacation, a pension and many other benefits. I’m grateful for these of course, but having lived without sick and holiday pay for 8+ years, and having set up my own pension, they hold limited appeal.

As I consider the effects of my change of employment brought about by IR35, I can’t see any of them being positive in any way, for me, my client or even the government:

  • I will earn less money as a whole, for doing exactly the same work. Aside from the impacts on my morale and motivation for work, this will materially limit my ability to save and invest for the unseen expenses that inevitably crop up in life, particularly when you have 4 kids to support, as I do. I’ll also be saving less towards my retirement.
  • I feel further demotivated to push myself towards entrepreneurial pursuits given the way the UK government has treated those of us who have tried to build businesses which might ultimately create jobs for others. I am determined to return to being a contractor at some point once the dust has settled on IR35, but I would have severe reservations in doing so in this country. I don’t know if this will ever be feasible (the government might have already seen off any possibility with Brexit, should it ever be enacted), but the global economy must surely offer other opportunities for contractors?
  • The government, who are presumably motivated in IR35 by ensuring they maximise the tax they collect as a direct result of my work, will receive (based on a quick calculation) around £13,000 less tax per year from me. This is based on the income tax and national insurance paid as a permanent employee, compared to corporation tax, income tax and VAT paid from my own company. The same figure must be largely true for every other contractor who converts to permanent employment?
  • The client is losing the flexibility to easily employ skilled, flexible resource to work on their projects and deliver the work they need done, paying only for as long as they need it. Instead, they’ll be increasing their workforce and increasing their fixed costs as a result. I’ll still need to be paid even if I’m on holiday or sick (and not working) or even if they haven’t got any project work for me to do.

Who is winning in this scenario?

I simply don’t know the answer to this, and I’m not sure anyone else does either.

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Errr… I do already?! (Photo by The New York Public Library on Unsplash)

Over the 20+ years I’ve been working since leaving university I’ve formed my own views on what makes an effective workforce, and the relative merits of a mix of both contractors and permanent employees to get projects delivered. Neither one nor the other is perfect in its own right.

Contractors can be seen as an expensive means of delivering a project if they’re over-utilised by clients. They build up knowledge and experience that is lost from the client organisation when they leave. On the flip-side, not all clients need a permanent team that’s devoted to delivering projects, nor can they afford the costs of employing such a team on a permanent basis. That’s where contractors fill a specific void and bring niche or scarce skills to the client, as needed.

Permanent employees can tend to become institutionalised through remaining in the same place for years on end. I hear stories of employees who know how to play the system to receive long-term sickness benefits for falsified health conditions, and who get paid for months on end without ever showing up for work. Employment rights are a great thing, but can easily be abused and make it nigh on impossible to get rid of staff members who have no intention of working to the best of their ability, or whose roles are no longer needed. On the other-hand, permanent employees help to establish the culture of an organisation, establish the long-term communities that personify the workplace, and form a significant part of the knowledge-base that helps companies to thrive and grow. Not everyone wants to move from organisation to organisation either.

There is a place for both resource models. This change wouldn’t be happening without IR35 and pointless government intervention.

The future of flexible resourcing may now be based around consultancies who offer whole teams of contractors working under the badge of the consultancy. I speculate that the running of these companies will merely add overhead costs to the resource costs, and this will in turn demand that client organisations pay inflated fees to access the flexible resources they were once able to source direct.

I’m trying to feel optimistic and positive about my impending move to permanent employment. I feel grateful that I’ll still be paid generously for doing my job, and I’ll still be able to support my family. The situation brought about by IR35 has been a source of considerable anger and frustration to me, and many others like me.

In the wider scheme of Brexit and other debacles being navigated by the UK at present, it’ll likely pass by unnoticed. It’s first world problems maybe, but for me and my family and many others like us, it will certainly have an adverse effect on our lives.

Toby

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A writer, dad and husband sharing his thoughts, wins and losses to help and inspire others. Say hello at bit.ly/TobyHazlewood

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