Limited company contractor population ‘to bounce back’ after IR35 reform

Resilient contractors will likely bounce back from any drop-off in the number of UK limited companies due to IR35 reform, leaving the PSC population, eventually, much as it is today.

So say three experts at the coalface of different parts of contacting -- recruitment, accounting and status, where a short-term dent in PSC numbers is projected to even out. Given time.

But the size of the initial dent divides the trio, partly because the “period of ‘interesting’ decision-making” by engagers affected by the reform is still ongoing, says Charlie Cox.

'There is a positive'

SThree’s commercial manager also said: “Where engagers have not understood or prepared correctly, they will have to make knee-jerk and likely incorrect decisions.

“There is a positive…the opposite is also true. Clients who understand and have prepared will mean that contractors [using a PSC] on an outside IR35 [contract can likely] keep doing so.

“Overall though, it takes time for clients to adapt to change… [so] I’d expect to see the usage of limited companies reduce very slightly. But very quickly rise again.”

'Either way, not permie employment'

Re Legal Consulting, a status advisory, agrees about the “initial knee-jerk reaction” being very much ongoing, but believes the impact on PSCs will be greater than just ‘slight.’   

“Quite possibly [we could see] as much as a 30-40% reduction in the volume of contractors providing their services through the limited company structure,” the advisory says.

“It currently looks like there will be a significant number of those PSCs moving to an umbrella company or a Professional Employer Organisation. But not permie employment.”

'IR35 reform like a dose of chemotherapy'

If the Revenue had its way, one of its former tax inspectors believes it would “kill off what the department sees as ‘the trade in PSCs,’ to leave only the genuine ones standing.”

But Carolyn Walsh, now boss at Andraste Accounting, also says the terms of the IR35 Reform Review gave the merest hint that ministers realise that bonafide PSCs “should now be supported.”

So she likens IR35 reform to a “dose of chemotherapy,” removing bogus PSCs – which she says could total 130,000, but retaining -- even emboldening, the outside IR35 operators.  

'Cost-increase of inside-IR35 contractors'

Their counterparts on the wrong side of the legislation might choose to keep their limited companies, even if their clients might not be happy at keeping them, hinted Cox.

“Clients who have not prepared [for the April 6th off-payroll rules] will feel the…likely cost-increase of engaging contractors on an inside IR35-only basis,” he said.

And of course not all clients will continue to put up with limited companies operating within the IR35 legislation, despite the fact that it can be beneficial to contractors.

'Tesco Bank will no longer engage PSCs'

Tesco Bank, for example, last week confirmed to ContractorUK that it has torn up its blanket inside IR35 approach to all off-payroll workers, and will simply no longer intake any PSCs.

A spokesperson for Tesco Bank said: “Like many other organisations, we have been assessing how we manage off-payroll resource.

 “In order to comply with IR35, Tesco Bank will no longer engage with Personal Service Companies from 1st February 2020.

“After this date, all engagements must be through PAYE or via a Freelancer and Contractor Services Association-approved umbrella company.”

'Give it six to 12 months'

Speaking generally (not about Tesco specifically), Walsh implied that contractors were too shrewd to close down their PSCs at the first sight of a single engager’s decision.

“There are contractors clearly outside IR35 who are being impeded by hirers’…short-sighted decisions in the [reform’s] run-up. But PSCs won’t be as short-sighted and instantly close.”

Sitting it out, or at least playing the ‘wait and see’ game is as good as advised by Re Legal Consulting’s founder Rebecca Seeley Harris.

“Maybe in six to 12 months when things have settled down, the market will move back to PSCs,” she predicts.

“This will be about the time when clients have been educated in how to work with contractors or freelancers to be genuinely self-employed, and realise that the flexible workforce is a necessary thing.”

At SThree, Cox gave exactly the same time frame – and reading, saying: “The market will even out over the next six to 12 months and then we’ll be in a great position where there is more clarity in the UK as to how to correctly engage and receive services from a limited company services provider.”