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Because of the coming IR35 changes, both me and one friend (working for a different company) have been offered to become employees and our managers, in both cases, told us the company will probably not invest into contractors anymore.

My questions is what do you think the possible scenarios will be for the private contracting sector in UK?

Here are some of the possible scenarios I can think about:

1) Companies will have less contractors and more employees. The few contractors remaining will be for the most caught by IR35, so it will be very hard to still work as a contractor outside IR35.

2) Companies will keep contractors, but they will be mainly inside 35 and will pay more taxes. However contractors will partially increase the daily rate to compensate.

3) Companies will keep contractors, but they will be mainly inside 35 and will pay more taxes. Contractors will be unable to increase day rates.

4) Companies will have less contractors and more employees, but only initially. With the time, companies will try to find legal tricks to shift the legal risks to the agencies, which will happily accept it, in exchange for more business. So, in the long term there will be again many contracting opportunities outside IR35.

What do you think will happen?

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I doubt this question will remain open for long; it calls for subjective opinion and a lot of speculation on a fairly specific UK problem.

I'll address your points with my thoughts though. For anyone unfamiliar with "IR35" or the impending legislation, I've included a short explanation below. I'll also try to keep personal opinions about private property rights out of it.

Scenarios

I think it's really down to the individual companies and the contractors.

1) 1st sentence yes; second sentence no. 2) Yes - although remember that this won't apply to every company, just some of them.

Scenarios 1 and 2 will both happen; I think the likelihood is 100%, but I don't think the scenarios are mutually exclusive, or all that will happen.

3) has happened already. Some of the banks have mandated a "no contractors" policy and one that I know has already stated it will only use contractors through umbrella companies. These companies will suffer in the long run, or be forced to use very large consulting companies. Contractors won't be "unable" to increase day rates; they'll quit and work elsewhere. Don't forget, this only applies to large organisations and most private companies in the UK fall outside that definition. Expect this to change in years to come.

4) Won't happen. The agencies are already at risk as they are part of the "contract chain", and in any case are less familiar with the client/contractors day-to-day working practices. For anyone outside the UK thinking "but the contract between two private parties says....", HMRC and the courts have already been proven to ignore this.

Your scenarios are all predicated on hapless contractors being "forced" to be employees, and exclude any possibility of working outside IR35.

In addition to 1 and 2), I think it likely that many large companies will find a way to work with contractors remaining outside IR35, or will take the view that the benefits outweigh the risk.

And the risk is this: "Blanket" determinations ("all developers are inside/ouside IR35") are unlawful and will be challenged by either the contractor or HMRC. I don't think (m)any companies will be stupid enough to do this.

This means the company has to decide that either the contractor is inside IR35, in which case they need to correctly calculate the taxes due and deduct them at source - This will lead to them being sued by the contractor for non payment of holiday, sick pay, pension contributions and other benefits enjoyed by their employees. This is not a theoretical "might happen"; I know of at least 1 case where it has succeeded, and I've been told there are a number of other pending cases.

The alternative is that the client determines the contractor to be "outside IR35" and takes the risk that the contractor might not pay the correct taxes and that HMRC might challenge the decision and might take it to court and the client might lose, in which case they would have to pay over the taxes that would have been due on an employee.

So inside/ouside? I know firsthand (and confirmed through another source) that contractors at HMRC, a public sector organisation, are outside IR35 - They imposed the rules on the rest of the public and now private sectors and yet are not impeded by them. I think the private sector will take a hard look at that and say "there must be a way to work around the legislation".


IR35 Overview

For non-UK readers, or those unfamiliar....

HMRC - Her Majesty's Revenue and Customs (aka the taxman). Formed from a merger (2003?) of The Inland Revenue and Customs & Excise.

IR35 was introduced in the late 1990s and was designed to prevent permanent employees leaving work to become contractors with their former employer as a client, but without paying many of the associated taxes.

The legislation has evolved over the years to trap more and more contractors, not just office based IT workers, with two enormous changes. The first occurred in 2017 and the 2nd will come into force in April 2020.

That change has been to force the end client to make a "status determination" about the contractor; whether they are "outside IR35" and a genuine business in their own right, or "inside IR35" - deemed to be an employee of the end client. In the first case, business as usual. In the latter case, the end client (or more likely the intermediary "agency") will calculate the tax due on the gross invoice amount, and deduct it before paying the contractor.

This change came into force in 2017 in the public sector (Government, Defence, National Health Service, etc) and is being forced on large private sector companies in April 2020.

Large is defined as over a certain size in terms of revenue.

About me

I've been an IT contractor since 2001, but had occasional freelance gigs prior to that. I've been a professional software developer since the '80's.

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