‘Domino effect’ of IR35 reform bites, as Lloyds, Barclays and GSK stop hiring limited company contractors

A “domino effect” of large businesses refusing to engage limited company contractors due to IR35 changes from April 2020 has begun, experts told ContractorUK last night.

In fact, mirroring policies put in place at HSBC, Morgan Stanley and M&G Investments, yesterday Barclays and Lloyds said that they too would 'cease and desist' all PSC engagements.

But the two banks were quickly joined by GlaxoSmithKline, where contractors say they will also no longer be hired as limited companies, despite 1,500 of them already being under IR35 investigation.

Further fallout to IR35 reform hit at HSBC too, where some contractors who individually met with HR to prove ‘outside IR35’ status were shocked to be terminated with immediate effect.

'Domino effect'

An HSBC insider said it was not a new bank-wide policy, partly as “a clear policy hasn’t been communicated other than -- via a consultancy, renewal is possible, via a PSC, no renewal.”

Regardless, says tax adviser Carolyn Walsh who CEST-tested one HSBC contractor as outside IR35 before he was shown the door, there is a sense of contagion to how clients are reacting.

“A domino effect is happening,” the accountant and former tax inspector warned. “It starts thanks to there being no trust in the CEST tool, even when it gives an outside IR35 result.

“Combine that with high-profile HMRC action on PSCs, like at GSK, and you see why more and more clients are opting out of the rules’ scope by going PAYE-only. And more will follow.”

'Real shame'

In line with her analysis, Barclays said it would “instruct its agencies and managed services providers to engage contractors on a PAYE basis only,” for new or renewed assignments.

Kate Cottrell, one of the UK’s foremost IR35 experts, told ContractorUK that such a policy was not even definitely compliant, despite Lloyds and Barclays seeming to rely on it.

“It is a real shame that these organisations have not waited a little while longer when we should have the final legislation and updated guidance from HMRC on a host of issues such as… if it will be possible to use an intermediary umbrella company,” she said.

“However, from the organisations’ perspective, where they have lots of contractors, complying with the new rules amounts to a huge amount of work, expense and of course opens them up to significant financial risk.”

'Single risk that needs mitigating'

Last week, HRC Recruitment warned that blanket, one-size-fits-all ‘inside IR35’ rulings on PSCs were increasingly the response to the April reforms from the very largest of engagers.

The firm’s Dean Durrant specifically said that the biggest users of contractors (which GSK, Lloyds and Barclays are), regarded IR35 reform as a ‘single risk that needs to be mitigated.’

In its memo to contractors’ line managers, Barclays confirms: “[Under April 2020’s rules] the end-user may be held liable for collecting the correct income tax and NICs”, it wrote, adding:

“In light of these changes, Barclays has reviewed its third-party resourcing arrangements and has decided that it will no longer engage contractors who provide their services via a personal services company, limited company or other intermediary.”

'Money is going to be an issue'

Shown the text of the bank’s announcement, innocuously entitled ‘Changes to the way Barclays engages contractors,’ Colin Morley, a director of Harvey Nash, said it raised more questions than it answers.

“Most notably, will Barclays oblige all contractors to go PAYE or opt to use umbrella companies?

“Either way, money is going to be an issue," he said. "So who will pay the tax, NI and the levy? Will contractors be expected to take the hit on PAYE? Will Barclays meet contractors somewhere in the middle, or will they absorb all the cost?”

'No adequate advice'

The problem for advisers, including Ms Walsh, is that contractors expect answers to these questions, but there are big unknowns, other than the fact that money is the motivator.

“I have no adequate advice to give because the decision has been made on the basis of cost and perception of risk, not the adherence to tax law,” she said, referring to Barclays and Lloyds.

“That said, I am sure that the…[banks] have not considered the cost of the loss of skilled contractors to their business, and the rising cost of engaging contractors via agencies under PAYE, which will come as a surprise when agencies are prevented from making savings on employer costs using umbrella companies next year, so will be seeking rate rises.”

'No rate increases'

Yet for contractors at Lloyds, no pay bumps is part of the non-negotiable small print.

“There are no rate increases to be offered to compensate for lower take-home pay,” one Lloyds contractor clarified, writing on ContractorUK's Forum.

“All PSC contractors will need to convert to perm or umbrella by 29th Feb or leave the group by 31st March. There is no CEST assessment being undertaken [and] nobody will be deemed in or out IR35; this is simply being communicated as a new method of engagement for PSCs.”

'Would not bear HMRC scrutiny'

HRC Recruitment’s Mr Durrant reflected: “For these [two big banking] brands [Lloyds and Barclays], it’s no longer a conversation about whether contractors sit inside or outside the legislation as by avoiding PSCs, the regulations simply won’t apply.

“They appear to have acknowledged that existing contractor agreements just wouldn’t stand up to the scrutiny of HMRC’s new systems.”

Some PSCs went online yesterday to fight the implication that their prior engagements at the banks must have been ‘a sham.’ And HMRC’s vow not to focus on past gigs was scoffed at.

But other contractors, including their advisers and agents, pointed out PSCs have been here before.

'Departments exposed'

“There were widespread walkouts in 2017 when the public sector IR35 rules changed -- something the financial services sector is undoubtedly keen to avoid,” said HRC.

“[So] we will likely see some of the banks increase [contractor rates] to cover the tax difference.

“Ultimately, it’s an expense they’ll be willing to cover in order to retain the headcount, and to avoid any risks of leaving crucial services or departments exposed.”

'Good position'

IR35 advisory Bauer & Cottrell said: “Some [engagers] will not take this [blanket inside-IR35] approach and they will be in a good position to engage the talented contractors they need. 

“[And anyway], we have seen how this has [ban on engaging PSCs] played out in the public sector – [so commercial] organisations will [still] find a way to attract the skills they need.”

Moreover, not everyone agrees the ‘domino effect’ is underway. HTC’s Mr Durrant does: “Two of the big banks making their stance known when it comes to IR35…[reform is] a move which will no doubt pave the way forward for any business yet to define its position,” he said. 

'Not typical'

Seb Maley, chief executive of Qdos Contractor, doesn't. Or rather, he implies even if the domino effect is now underway, there’s no saying how many dominos are in the stack.

“While Barclays’ reported approach to managing IR35 reform is short-sighted and unnecessary, it’s important that contractors realise this is not a typical response. Nor do I expect it to become one."

He added: “If the bank is to go ahead with this, they will lose out on the flexibility and savings achieved when compliantly engaging contractors outside IR35 -- something that we expect most private sector firms to continue enjoying when the changes arrive.”

'There's still time'

Matt Fryer, a director of Brookson Legal, agrees about the business, staffing and efficiency risks engagers open themselves up to if they blanket assess and then ‘go PAYE-only.’

“Businesses which intend to offer their contractors permanent positions, with benefits, will find that they lose the advantages and agility of a flexible workforce.

“There may only be six months left until IR35 off-payroll changes come into the private sector, but there is still time for companies to avoid having to make blanket decisions like this one.”

He also said: “Specialist advisers familiar with employment case law can help assess the working practices of genuinely self-employed contractors and provide businesses with guidance on how to keep them outside of the IR35 legislation and retain their skilled contractor talent.”

Spokespeople for Barclays, Lloyds and GSK were invited to comment but were unable to do so before ContractorUK went to press.

Editor's Note: UPDATE (On Oct 2nd): A spokeswoman for GSK said no formal announcement on how the company will treat PSC contractors has yet been made.

“GlaxoSmithKline acknowledges the important contribution that contract workers provide", the GSK spokeswoman said. "We have not yet made any final decisions regarding our future IR35 strategy. Any changes will be communicated internally first, in line with our values and expectations.”

UPDATE (Dec 19th 2019):

Major brands shut shop on limited company contractors, not just for Christmas