It appears that predictions about the private sector IR35 reform are proving true. Following the path already beaten by banking giant HSBC, two more private sector corporations have decided to sidestep IR35 altogether by cutting their use of limited company contractors. These companies are Morgan Stanley, a multinational investment bank named 6th largest in the US in 2018, and M&G Investments, a UK-based wealth advisor and investment house currently worth around £351bn.
Both financial firms have confirmed that they will no longer engage PSC contractors after a yet unspecified date in 2019. This could make work difficult to find for contractors that typically work within the financial sector going into 2020, and is portentous for what other large private sector businesses are planning for the advent of IR35.
Lose-lose inside-IR35 working options for existing Morgan Stanley and M&G contractors
Much like in HSBC’s plan to move away from engaging PSC contractors, Morgan Stanley contractors have been given some working arrangements to choose from. One such ‘viable’ suggestion is to continue to work for the company inside the off-payroll rules. This would mean continuing to work for the same hourly rate, but paying significantly increased tax and with no employee benefits – i.e. holiday and sick pay, or a pension scheme – to speak of.
Contractors who have been given these working options already feel pressured to make a decision, despite no cut-off date having been firmly set yet. One Morgan Stanley contractor, speaking to Contractor UK, spoke out on the subject.
“I’ve got to give an indication of which one [of the options I want to go for] by tomorrow end of play,” he said. “[The options are] leave Morgan Stanley, go full-time, or go PAYE. I’m not sure of the ins and outs of going PAYE… I’m also not sure if I want to tie-up [my] company and go full-time.”
M&G stated that “in line with the rest of the financial services market, it is imperative we operate a fully-compliant, revised engagement model”.
Knee-jerk IR35 sidestepping could cost Morgan Stanley and M&G down the line
The lack of clarity and education around the off-payroll rules supplied by HMRC is beginning to show, with statements like M&G’s telling a story of knee-jerk avoidance as opposed to considered, long-term planning. As forecasted in our previous article on HSBC’s somewhat rash decision to can all contractors, others in the industry are quickly following suit.
Andy Vessey, Head of Tax at Larsen Howie, suggests that these financial firms – and any other large company that mimics the IR35 avoidance displayed by HSBC, Morgan Stanley and M&G for that matter – is cutting its nose off.
“It’s very disappointing that huge financial organisations as such have adopted such a negative attitude and one which they may well regret in the long term," he says. "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.”
“These large financial firms could 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.”
Morgan Stanley and M&G push contractors towards IR35 ultimatum
Pete Willcocks, founder of Larsen Howie and ex-Qdos insurance veteran, thinks that these financial firms are looking for an easy get-out, perhaps to avoid having to pay a dedicated Senior Accounting Officer to oversee the application of IR35 to the thousands of contractors engaged by the likes of HSBC, Morgan Stanley and M&G every year.
“Even if the engager succeeds in getting current contractors to continue providing their services inside IR35 for the same rates – frankly, a terrible deal for the contractors – they’d have to change a lot more than just the contract wording to be compliant with the off-payroll rules,” he says. “While HMRC does indeed take certain contract clauses into consideration during an IR35 tribunal, they scrutinise the contractor’s working practices with much more vigour. Chances are, these firms will push contractors towards becoming employees or leaving. Their actions already have shown that they consider any grey areas to be too high-risk.”
Another M&G contractor speaking to Contractor UK confirmed a feeling of impending ultimatum.
“There are probably less than 100 contractors on site at the moment, and the work is being gradually shifted towards permies, while the contractors left are rolling off naturally, in line with project end-dates,” he said. “Those of us who are left are referring to it here as ‘The Departure Lounge.’ Yet most of us are old hands and are all pretty realistic. There is no point making plans for what-ifs.”
Additional IR35 advice
If you’re concerned about IR35, we offer a range of contract reviews with comprehensive advice on how to stay outside the legislation. We also offer IR35 Tax Investigation & Liabilities insurance (TILI), which includes tribunal defence from our resident tax and IR35 expert Andy Vessey ATT as part of the policy. Andy is also available for IR35 training, conferences and specialist commentary on the off-payroll rules. Please get in touch.
You can also read more about IR35 and what you can do to minimise your investigation risk here.