With less than a year to go before IR35 hits the private sector, the first contractor cull announcement has come from banking giant HSBC. Those campaigning against the legislation have previously warned that medium to large companies could simply decide to stop using contractors due to the ambiguity of IR35 and the associated risks of a wrong employment status determination. However, these predictions have gone unheeded by HMRC, directly resulting in HSBC's decision.

Regardless of if the international bank decides at a later date to reverse the decision, others are sure to follow its example before April 2020.

HSBC gives contractors employment ultimatum

On Wednesday (1st May), ContractorUK reported that HSBC will stop engaging limited company contractors from September 2019 in a bid to avoid the private sector IR35 reform altogether. Contractor-heavy departments like HSBC Digital will be offering one further contract extension to its self-employed workers; after that, said workers must choose between being terminated or becoming an employee.

HSBC has allowed some exceptions to the rule, however. The bank will offer select contractors on a ‘keep list’ continued contract work, on the condition that they supply their services through a third-party from September.

The bank has decided to remove itself entirely from April 2020’s obligation to determine contractors’ IR35 status. By offering one of three routes to its contractors - becoming staff, becoming a third-party’s PSC, or termination – HSBC is eradicating any risk of a wrong-determination fine or a hefty tax bill.

Will the decision to axe a flexible, specialised workforce in its entirety ultimately be a bad one for the bank?

IR35 kneejerk reaction from private sector

While HSBC has certainly taken the most direct route to removing any IR35 concerns, it’s been criticised by some as a short-sighted business decision. Described as akin to ‘using a sledgehammer to crack a nut’, this kneejerk reaction to the impending private sector IR35 reform is one we can expect to see from many more medium to large companies over the next year, despite there being many pros to using contractors as part of a larger workforce.

Andy Vessey ATT, Head of Tax and IR35 specialist here at Larsen Howie, comments:

‘It’s very disappointing that a huge bank like HSBC has adopted such a negative attitude and one which they may well regret in the long term. However, this has been a concern of mine since I spoke to a local representative of Santander last year, shortly after the first consultation in May 2018.’

‘That person told me that that the off-payroll rules were too much trouble and that the bank was likely to adopt a blanket assessment approach, i.e. all disguised employees or indeed actual employees. I wonder if HSBC shareholders are happy for the bank to pay unnecessary employers’ NIC?’

‘If the bank does point contractors in the direction of a contracted-out services provider, then they will have to be certain that they are happy to relinquish control of project work to that third party and that the contingent workers are not personally providing their services to HSBC. If not, they will find they still need to consider the off-payroll rules.’

‘HSBC could also be shooting themselves in the foot by inadvertently directing highly skilled contractors to competitors who are willing to embrace the proposed changes and are willing to work with freelancers to preserve their self-employed status in a legitimate manner.’

IR35 more hindrance than help

HSBC’s contractor cull is clearly meant as a self-preservation measure, yet it could have the opposite effect. Already, rumours of a contractor mass-exodus are circulating – after all, experienced, talented contractors will have little problem taking their services elsewhere. Many of these contractors will have worked with the bank for a number of years, taking with them in-depth technical knowledge of HSBC’s programmes and processes. Not only will this be difficult to replace but it could prove a threat to HSBC as a business, particularly if those same contractors are approached by a similar business willing to apply the off-payroll rules correctly.

The move has also been noted as premature on HSBC’s part, with Bowers Partnership, a recruiter of niche financial contractors, commenting:

‘As we’re still several months away from the draft legislation, for HSBC to make such a bold move – assuming it transpires - seems somewhat premature. Even if it doesn’t, surely most of the contractor workforce at HSBC will be now limbering up for a serious summer of job-hunting? There are four productive months between now and September, and the good contractors should be able to bag a new role elsewhere.’

Despite universal criticism of the contractor cull across the industry, it’s still a very real prospect that other large private sector companies follow suit regardless. To feel uneasy about the potential impact on contractors, recruiters and British business as a whole should this method of dealing with IR35 become a trend would not be unreasonable.

IR35 advice for hirers

HMRC has made a point of hosting a series of IR35 webinars, as well as publishing guidance on how to approach IR35 (somewhat jumping the gun with their latest publication, considering the private sector IR35 consultation is still open), but the advice given is notoriously vague. An international bank like HSBC most likely sought out professional guidance before making such a large change to its hiring process - especially considering that the planning and paperwork involved will be substantial – which begs the question: is this decision just drastic risk-avoidance or is there a longer play in motion?

Either way, it certainly sets a precedent to similarly sized businesses when it comes to IR35. How companies decide to tackle the legislation change in the long term will dictate how viable an option limited company contracting remains.

Despite the announcement, an HSBC spokesman said on the subject:

‘Most major UK firms are looking at their post-IR35 management of contingent workers and like many companies, we have not made any decisions on our future policy towards this important sector of the workforce. We are unlikely to form a firm view until the summer when the final guidance is set to be published by HMRC.’

Does this mean there’s scope for a change of mind from the bank, or are they simply waiting for the dust to settle? Regardless, the damage could’ve already been inflicted, particularly on HSBC’s own contracting workforce. The bank could find itself shelling out to repair contractor relationships as a result of this rash reaction to IR35 - not so dissimilar to the BBC.

If you’re concerned about IR35, we offer contract reviews with comprehensive advice on how to stay inside the legislation. Our resident tax and IR35 expert Andy Vessey ATT is also available for training and can offer defence in the event of an investigation. Please get in touch.

You can also read more about IR35 and what you can do to minimise your investigation risk here.