What a contract IT recruiter wanted from Osborne

The second Budget of 2015 may have been delivered when the sun was shining – in early July – but it did not make IT contractors smile, writes Ian Temple, chief executive of contractor recruitment specialists Hydrogen.

Even without getting into the detail of the well-publicised ‘anti-contracting’ provisions, there is hardly any contractor we’re speaking to in the professional temporary labour market who doesn’t think that something unpalatable is afoot. 

But did Summer Budget 2015 make IT recruiters smile?

The IT labour market has changed dramatically in recent years. Fuelled by the supersonic pace of technological development, IT wizards abandoned the safety of perm roles and migrated in droves towards very lucrative contracts. These temporary contracts are so well-paying that they even managed to lure back retired permies to the fold. Recruiters too wanted ‘in’ on the action and some have completely abandoned full-time IT vacancies.

Skills shortages, levies and migrants

But one of the things that keeps contracts so lucrative – and sometime prohibitive to start-ups who’d love a niche IT contractor if only their budget could afford it – is skills shortages. These shortages are now the norm in the IT market, so much so that every month a new IT skills ‘scarcity’ list is published. Like many of our clients, we were hoping that George Osborne would use his Summer Budget to tackle this ongoing drag on UK business expansion, productivity and economic growth.

Yet the chancellor didn’t; not really. In fact, his first Budget under a purely Tory government fails to bridge the IT skills gap, both in what it contains and, often overlooked, what it doesn’t contain. Addressing the immigration limits on highly skilled labour is one area we had been looking to see some progress. Unfortunately this was omitted.

What did get some cheer from parts of the business and recruitment communities was a new Apprenticeship Levy on larger employers from April 6th 2017. This compulsory levy is intended to provide an employer contribution to supplement government funding for training of all post-16 apprenticeships. The funds raised by the levy would provide apprenticeship employers with a digital voucher that could be used to buy training from recognised providers.

It’s true; this levy may narrow the skills gap – but only in the long term. The short term availability of specialised IT talent remains an issue for our increasingly digitised country, but contractors who possess the skills that are scarce might not complain. After all, it is this scarcity that drives the increases in their daily rates.

Financial firms now capping freelance IT contracts at 2 years

The financial services industry, where those rates tend to be the highest, is tackling an issue of another making. Having heard about Supervision, Direction and Control, and potentially the idea in the IR35 consultation of putting a time limit on employment engagements, it is jumping before it’s pushed. In particular, we are seeing sporadic evidence from large financial clients who use IT contractors in a big way that they are now beginning to limit the length of contracts (accumulatively) to less than two years. Anyone wishing to stay longer has to go on the payroll.

Job-returners and start-ups

When coupled with the Budget’s ‘anti-contracting’ package, including the tax hike on dividends, this self-imposed measures from financial firms suggests permanent employees who might have recently flirted with the idea of contracting are about to be turned off.

This is particularly unwanted at a time when it’s all hands to the pump to boost employment, because temporary work has been shown to be a popular route for people who want to re-enter employment. If people perceive that the chancellor has a hostile attitude towards a part of the labour market, they may choose simply not to enter it at all.

Another contingent that probably isn’t singing George Osborn’s praises is start-ups. That’s because in Summer Budget 2015, Mr Osborne failed to address the 50,000-75,000 start-up loans as promised in the Tory manifesto. This inaction will disproportionally affect the IT employment market as technology dominates the start-up space. But one upside is that by not foisting droves of tech-hungry start-ups onto the labour market, the government may have alleviated some of the technology skills pressures that large corporate are feeling. However whether the chancellor thought this, and decided not act out of consideration for such big businesses, is unlikely.

Final thoughts

Now the dust has settled on the Summer Budget 2015 red book, we anticipate that at least some IT recruiters (with a lot of foresight) could start working towards setting up perm capabilities, in light of the compliance clampdown on contractors. On the other hand, one only needs to look at the scarcity of IT talent in the labour market to realise that the two-year assignment cap  in financial services, which has been triggered by ‘SDC’ fears, will further increase the fees and costs of IT projects to business. Coupled with highly-skilled migrant labour visa restrictions and the prime minister vowing to further tighten up these rules, the upshot seems to be higher rates for home grown IT talent. So for now at least, there’s the ingredients of good news for contractors and potentially their recruiters too. Longer term, the employer apprentice levy, if used properly, will no doubt increase the availability of IT talent, but this is years away.