Vodafone joins ‘deluge’ of companies banning limited company contractors over IR35 reform

Vodafone Group plc has joined the list of end-users banning PSCs -- a move initiated by HSBC which itself has revealed its ban sits with a 25% pay cut to move to PAYE, ContractorUK has learnt.

In fact, the telco said it will no longer engage contractors on a limited company basis beyond December 1st in the same week that the bank said its ‘Ltd’ hires stopped on November 1st.

But PSCs at Vodafone will worry if their ban takes on any more characteristics of the HSBC ban (both engagers are mandating umbrella/PAYE-only for contractors who want to stay on).

'Twenty-five per cent rate cut'

In an internal memo to its PSCs, seen by ContractorUK, HSBC reiterates its ‘no PSC’ policy but then outlines a new, downgraded pay rate in a ‘PAYE details’ section;

“My concern here is that the offered rate in the letter includes a 25% cut,” a HSBC PSC says. “That’s not taking into account any out-of-pocket hit, or risk caused by moving inside IR35.”

And that risk is very real for PSCs who accept a PAYE transition, according to IR35 expert Kate Cottrell, for both contractor and client alike.

'Woolly HMRC assurance'

“Regardless of HMRC’s woolly assurance of no targeted retrospection, being placed on PAYE -- although not an admission by the client that IR35 actually applies -- for the exact same role a contractor has previously treated, as outside IR35 definitely presents a high risk”, the founder of Bauer & Cottrell said, further warning:

“It’ll be especially high risk if they have no evidence to support that their decision was taken with ‘reasonable care.’ 

“So contractors really can’t afford to wait and see what their clients are going to do about the new rules. The first action is to establish what their incomes are likely to be, and the impact of any retrospective claims by HMRC.”

'Probably seems reasonable to hirers'

But Carolyn Walsh, also an ex-tax inspector, says end-users probably regard themselves as being fair by mandating either PAYE or “you will be required to exit,” as HSBC says in its memo.

“An umbrella company currently provides the same net pay as a contractor operating under IR35 on the same pay rate, so although harsh-sounding, the current instructions probably seems reasonable to hirers.

“But in April 2020, when hirers and agencies must pay the employer costs separately to the workers’ advertised pay rate, the true cost of employing freelancers will start to dawn on hirers, in both monetary terms and the loss of a flexible workforce,” she says.

'Hastily renegotiate rates'

Hirers may therefore find they have to “hastily renegotiate pay rates” in April, if their reaction in January or February is to ‘strongarm ex-limited company contractors into being paid via an umbrella,’ the former inspector added.

Seb Maley, CEO of Qdos Contractor reflected: “HSBC’s IR35-and-pay-cut ultimatum to contractors is another example of a private sector firm taking a needless and risk-averse approach to incoming changes. Unfortunately, it looks as though several other banks are to follow suit, initially at least.”

Dr Iain Campbell of the IHPA, a critic of the IR35 reforms confirmed: “The banking sector exodus of skill due to IR35 reforms has already commenced... [it’s] sad, damaging, but hardly surprising.”

'Talent mistakes'

On LinkedIn, a recruitment agency boss tried to reverse the tide. “If your contractors’ projects are compliant with IR35 regulations you can keep them onsite, with no issues at all,” said the boss, beginning an appeal to end-users.

“A blanket approach – everyone now being inside, from what I can see, isn't the right strategy. Look at each project individually and make a decision based on the specific conditions seems a much more sensible approach…[especially for] companies who want to take advantage of their competitors for talent mistakes.”

For now though, the stream of companies deciding to no longer engage limited companies – initiated by HSBC back in May 2019, has evolved into this ‘tide.’

'Deluge'

“The deluge of companies, which have misinterpreted HMRC’s attempt to help hirers to properly ascertain the status of contractors before engaging them, is growing daily,” says Walsh, the owner of Andraste Accounting.

The accountant added: “It is truly shocking to see that hirers are prepared to tell contactors ‘accept payment through an umbrella company or get out’, so any advice [us advisers can offer] would be like putting a very small finger in very large hole in the dam.

“Let’s reluctantly accept that we can’t hold back the tide with reason alone, instead we [as advisers] can [only try to] make the future crystal clear.”

'Short-term fix'

Drawing on what has happened in the public sector since its IR35 reforms took effect (the private sector IR35 reforms are modelled on those), is therefore key for such experts.

“Blanket change or leave statements do not get projects delivered where there is a need for the skills and talent to deliver them

“This is in fact a short-term fix, as we saw with the public sector off-payroll rules,” says Cottrell.

The status expert added: “A key issue will be knowledge transfer and let’s hope those same organisations have got in place some stringent risk policies for managing their projects post-implementation of their changed approach. 

“We will have to wait and see if those in the same industry [as Vodafone] adopt similar policies. I fully expect that just like the banks, not all [telcos] will follow the same routes and this will give rise to opportunities to attract and keep talent or skills for those that do not.”

'Could impact many thousands of telco contractors'

At Qdos, Mr Maley sees the development at Vodafone similarly. “If Vodafone leaves contractors with no option but to work via an umbrella, that isn’t to say this approach will be representative of the entire telecoms industry come April 2020 - as you might argue it looks to be in the banking sector,” he said.

One Vodafone limited company contractor isn’t as optimistic. “I have been told umbrella-only will be effective from Feb 2020 although I suspect it’ll be changed to effective from 1st April 2020.

“I also suspect many other telcos will be doing something similar. This announcement could therefore impact many thousands of contractors,” he said.

A spokesman for Vodafone said: “As with all large organisations in the private sector, we are implementing IR35 in order to comply with the new legislation.”

A spokesman for HSBC said: “We value our contingent colleagues’ contribution to HSBC, and we are working to best to optimise our workforce profile in line with our business requirements into 2020.”

'Disappointing, but understandable'

Shown the corporations’ respective statements last night, one adviser to PSCs wasn’t convinced of the sentiments but was sympathetic, saying:

“It is extremely disappointing that many of these large organisations are simply not bothering to apply the proposed rules – yet it’s understandable if they have a lot of contractors.” 

As to the risk of retrospective IR35 enquiries, the adviser confirmed: “You can almost hear the champagne corks popping at HMRC/HMT.”