Our dying IT consultancy’s final plea to chancellor Sajid Javid over fatal IR35 reform

The blunt approach to the government’s forthcoming IR35 legislation being taken by two banks (inevitably more in the coming days), will undoubtedly put small consultancies like ours -- in technology and other sectors, totally out of business. 

If this is not the intention of HM Revenue & Customs and HM Treasury, write the founders of a consultancy now banned from supplying PSC contractors, then why is the government not stepping in to do anything about it?

The IR35 small company exemption is meaningless

Among the many unsatisfactory areas of the new IR35 framework from April 6th, a major one is the so-called ‘small companies exemption.’ Under this exemption, currently in draft form, the responsibility for IR35 status is supposed to stay with the intermediary/PSC, and not pass to the end-client who is engaging the intermediary/PSC.

These tiny companies which are meant to be immune from the reconstituted off-payroll framework are specialist, boutique and innovative, led by entrepreneurs who are trying to grow the economy. We know this because we are them.

These small companies are often start-ups who have a niche offering, and need the flexibility of flexible, contingent resource to develop a service or product offering. Large firms use these specialist, niche companies to help themselves deliver their big services at a faster, cheaper and better rate than traditional outsourcing organisations are able to. We know this because that’s what our big corporate clients have told us. Precisely. More than once.

But come this quarter’s end, our small enterprise is set to collapse. So the exemption – the immunity for small firms like ours -- is meaningless. Let us explain why we’ll go the wall.

What our technology business does (and will no longer do for the economy)

Our business provides specialist, confidential development-related technology to several financial institutions. The resource of my company (we just about hit double-figures in terms of the number of people we use), is a mix between permanent hires and specialist contractors – each of whom diligently run their own limited company. As part of our niche service, we are often asked by financial institutions to execute extremely short-notice development work (and technical studies) which we call on our freelance, contract resource pool to deliver. Only they have the skills to do it. Only they can pull it off in such an impossibly short timeframe. Only they understand the urgency and precision of the high-level work required.

Yet nonsensically, the financial institutions are now forcing us to sign a written agreement which mandates that all of the freelance resource we use must in future be taxed as full PAYE, as well as us having to pay an extra 14% Employer’s NIC on top -- or pass this on to our freelance resource. Small company? Get hit big.

The implications for our consultancy are five-fold. And fatal:

  1. We cannot afford to absorb these costs because our margins are not enough and haven’t been factored in to the banks banning our businesses from providing them with other stand-alone businesses.
  2. Our freelance resource will work elsewhere rather than be strong-armed into becoming employees (strong-armed by us, and us in turn are being strong-armed by the banks)
  3. We will then be obliged, legally, to provide any PSCs who do agree to end their freelance careers with us with sick pay, holiday pay, even pensions provisions, in line with our permanent resource. We simply cannot afford to manage these extra costs.
  4. We, faced with not enough personnel, will then not meet our Service Level Agreements with the financial institutions – Lloyds Banking Group is among them. We will then be financially penalised as per the terms of the LBG contract.
  5. To add insult to injury, one bank on our client-list wants to reduce the cost of their work order with us by 10%.

Here’s what you could have had, chancellor

Taking these financial pressures into account, our consultancy business cannot continue. And it’s a business that has been growing rapidly over the past 18 months. In fact, if we were to maintain the current growth rate, we would be a very successful consultancy, creating some single-figure millions for the economy -- probably in the next 24 months alone. 

But as a direct result of both the government’s IR35 legislation and banks’ disingenuous, blunt interpretation of it, we are a consultancy facing closure. Our collapse will lead to the loss of jobs, tax, income and service. It is utterly crazy to us that nobody in government (save for a handful of MPs), and literally no decision-maker at the offending banks cares. At all. 

Plans on how to best wind-up our company are already on the table between our accountant and ourselves. From a personal perspective, sleepless nights are now the norm because the impact of this misinterpretation of IR35 reform is going to destroy livelihoods as soon as March 1st. For that is the day when we’re due to make three of our permanent members staff jobless (albeit with 4 weeks’ notice).

So chancellor Sajid Javid, please don’t talk to me about an IR35 reform review that concludes in mid-February; and that concerns only the implementation of the April framework. Any changes from that review, even if they are positive, will come into force too late for us. Things need to happen in the next seven days or otherwise we, and other consultancies, will be toast. The sleepless nights being over by then is the only solace.

As I lay there in the dark at night, I sometimes wonder how many small, specialist entrepreneurial companies of yesteryear, which have now grown onto become successful FTSE companies generating billions, would not have thrived, should this legislation and blanket ban by the banks on consultancies’ PSCs been in place?  Like us, they would no doubt have been snuffed out, disappearing as quickly as they emerged.

Insulted, saddened and soon to shut

It’s probably little wonder to you (at this stage of this article), why I find the comments from government officials as to why they will not delay or drastically rethink IR35 reform, nothing short of insulting. “Access to better broadband so people can work from home”  and “Access to Credit,” never made the government sound more out of touch with the realties that entrepreneurial consultancies are enduring because of unwieldy IR35 reform, mishandled by banks.

Just a little while ago, when he was looking for votes to stay in Number 10 Downing Street, Boris Johnson said: “When people get up at the crack of dawn to get their business ready; when people take out a mortgage for a new venture; when people have the guts to put a new product on the market, we don’t sneer at them we cheer for them.”

Well, we can’t actually dwell on this statement too much because of just how much it saddens us. We and other enterprising individuals who helped us have spent countless hours, unpaid, at all hours of the day and night, setting up our consultancy. Just to get it off the ground. We got small loans, credit agreements and even investment. We held industry events. And prime minister, we’ll soon be shutting.

At a time when UK Plc needs to be strong and have a good, dynamic economy not least because of Brexit, why is the government and the financial sector, engaging in this deliberate attempt at self-harm by shooting itself in the foot by draining the life-blood out of small companies? Why are MPs and government officials fiddling while the flexible workforce for UK Plc burns?

A final plea

The people who are responsible for this policy decision (in government) and policy misinterpretation (by industry), are simply not responding proportionately. They are simply not showing any understanding of the situation, the livelihoods at stake, the entrepreneurial disincentive and damage. It is reprehensible. This will surely become a scandal in a few years’ time, but it will be of little comfort to the very many hard-working people affected right now. What’s insane-making is that these decisions make no commercial sense whatsoever. To save our tiny business and dozens of others, I implore ministers to act.

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