How Brexit for contractors is shaping up, as 2018 winds down

Given that it was exactly this month last year that I broke the unrevelatory news that Brexit was an uncertain business for contractors, you’d hope by now -- some 12 months later – that it would no longer be, writes Graham Palfery-Smith, chair of overseas contractor compliance advisory 6CATS.

In the main though, your hopes would be in vain. But not entirely. We do now know, definitively, that the UK is leaving the single market, and we know that free movement (what IT contractors said they wanted), will end after an ‘implementation period’ of about two years. Based on these ‘knowns,’ can we piece together anything further to reduce the still considerable number of ‘unknowns’?

Where we’re at right now

We do also know that prime minister Theresa May is politically hobbled by her lack of a majority and the perennial threat to her leadership. Her ‘Chequers’ proposal is dead in the water, with no majority in favour of it -- in either the UK parliament or the EU.

In opposition, the Labour Party appears confident of achieving victory in an early election, thereby making an election call much less likely, meaning that there will inevitably be some sort of compromise cobbled together.

Even the term of the moment; ‘no-deal’ is no such thing, as it will mean the UK operating on WTO terms. This will not necessarily be a disaster for the temporary workforce, as requirements for contractors, working compliantly, will probably be similar to those already in place now.

We also know, because this whole thing, sadly, is about politics not economics, that the EU seeks to punish the UK for having the temerity to have the vote, and decide to leave. Their public view is ‘pour encourager les autres.’ In other words, the EU must make an example of the UK in order to discourage any other states from resisting a greater Europe or, depending on your viewpoint, creeping federalism. So, they are not going to make it easy.

What might happen next?

Despite Mrs May’s unsuccessful meeting in Salzburg, the apparent mocking of her dancing by none other than the EU Commission President and the failure of our newest Brexit secretary to achieve a breakthrough with Brussels, my belief is that the negotiations will continue and eventually, there will be a deal. Of sorts. Remember, ultimately, both sides want the same thing; a deal.

And while it will definitely not please everyone (it has been said that the best deals leave all parties mildly disgruntled), this is probably the best we can hope for. The hope is that because all European states are dependent on taxes raised from their largest businesses, it is likely that there will be pressure exerted by these businesses to reach a compromise with the UK.

So a ‘deal of sorts’ is the likeliest conclusion.

How do contractors stand to be affected?

UK contractors will probably see no meaningful change to their operations for a while yet, even once the nation’s actual exit from the EU has taken place. The three most likely scenarios, for contractors operating within the EU, in my view are as follows.

Scenario 1

Contractors operating across the EU may have to deal with further restrictions (than they have currently) of some sort. These will be flagged in advance and unfortunately will add levels of administration, where few exist now.

It is key to remain aware that to work now in any European country legally, there is a degree of administration in terms of registering for tax, for example. That is if the contractor is operating legally and compliantly.

So in Scenario 1, EU contractors would still be able to work across the EU, but to work in the UK, they might have to register, certainly during the implementation period and afterwards as well. It is likely to be much easier for ‘higher-skilled’ workers (as the Migration Advisory Committee would term them) to be able to come to work in the UK.

But keep in mind; the UK economy (and every EU country) cannot manage without importing labour, at all levels, from outside their borders. This is again a problem with the non-conflation of politics and economics.

Presently, UK contractors are working across the EU but, in our experience, represent only about five per cent of those operating internationally. We may see a return of that UK talent diaspora; similar to Ireland in the 1990s and China and parts of Africa now. This could take up some of the slack and might offer UK opportunities for some contractors.

Scenario 2

The second possible scenario is that the negotiators, on both sides, realise the critical importance of the flexible, agile and mobile workforce that contractors partly represent and design an agreement which will make it easier for contractors to operate across the EU and in the UK, to the benefit of those economies. Obviously, while this is the most desirable scenario, it is certainly the least likely at this stage.

Scenario 3

The third outcome, which is currently more plausible, requires envisaging the situation post-transition in, say, May 2021 with an election due in a year. At the heart of Scenario 3 is the real possibility of the UK electorate disgusted at the utter shambles of Brexit created by the sitting government, and contemplating the election of a (neo-Marxist) Labour government.

This outcome would lead to significant issues for the UK contractor population, triggered by potentially adverse impacts on tax and the economy due to both the inevitable capital flight and promised interference with the fundamental rights of contractors to work -- umbrella companies, for example, would be no more under a Jeremy Corbyn-led government. This is a far more profound concern than the possibility of having to fill out an online form to travel to an EU country!

What does a contractor’s post-Brexit future hold?

From my standpoint, the only contractors who need to be seriously concerned about operating in the EU post-Brexit are those who are not doing it correctly and compliantly now. That’s because it is simply not going to get any easier to use an underhand, inappropriate or downright illegal ‘solution’ such as a fake A1, or split solutions, or using a UK PSC in the EU with deliberate misinterpretation of the 183-day rule. So, if you are not doing it correctly now then you should be worried, because there’ll soon be next to no room to manoeuvre around rules and regulations.

In fact, certain to increase is the crackdown on non-compliant payment, contracting or labour ‘solutions,’ as one rare area of agreement across the EU, UK and most of the rest of the world is the Common Reporting Standard. This facilitates the sharing of tax data between more than 100 countries. There is no government anywhere that does not want to increase its tax take, and they will inevitably start with those wilfully dodging tax and compliance who don’t have armies of lawyers to fight back.

This means that contractors who focus on maximising their retention, by utilising ‘solutions’ that do not meet with the requirements of local tax authorities, will be pursued with even greater vigour. Couple this with the introduction a year ago of the UK Criminal Finances Act, which makes the facilitation of tax evasion a criminal offence for recruitment agency-owners and directors, and which HMRC is using aggressively to target some. Thus, we expect to see responsible employers and recruitment agencies pushing contractors to be compliant, wherever they are working. Most professional contractors don’t need this push, but beware because it is coming.

Berlin, Budapest or, even, Brussels?

Overall, we believe that there will continue to be lucrative opportunities for contractors working across the EU and further afield post-Brexit, thanks to the ‘deal of sorts’ I envisage. Precisely how things will work for you to execute a contract in Berlin, Budapest or (perish the thought!) Brussels, nobody yet knows, but it is certain that compliance will be higher on the agenda than it is now.