‘Prolific’ contractor bans due to IR35 reform putting defence projects ‘at risk’

Some of the UK’s leading private sector defence projects could be at risk over the coming weeks, if 75% of PSC contractors stick to their guns and walk out over April’s IR35 reform.

In the first sign that the reaction to reform may even affect national security, researchers said PSC bans at defence firms were so “prolific” that they were currently “more concerning” than the banks’.

Although more banks have PSC bans in place, aerospace, defence-export and MoD projects are now “being impacted” by such workers jumping or getting pushed, said the researchers, for off-payroll.org.

'Risk, and risks'

“The number of projects at risk [in sectors like defence], and the scale of these risks are greater than we expected,” said the website’s founder James Poyser, a contractor accountant.

He knows the off-payroll tax uplift is still officially deemed ‘very high’, but he fears the drag of retail, pharma, banking and defence projects being shelved or scrapped won’t have been factored in.

“HMRC's business case is very mono-focussed: it does not consider the wider impacts beyond immediate tax revenues,” said Mr Poyser, the chief executive of inniAccounts.

“As we leave the EU, our balance of payments will become more vital than ever and it beggars belief that we'd be jeopardising exports -- or our international reputation.”

'Won't be delivered on time'

According to the research, 75% of PSC contractors on projects spanning the UK’s major sectors like defence have already left their client, or will do in the coming days or weeks.

Slightly less but still a clear majority -- 60% -- warn that their project will “fail to be delivered on time,” due to either PSCs being banned or PSCs walking off-site.

And among the most senior contractors who have oversight (Project Managers or Programme Managers), a hefty 85% said that their client lacked “sufficient mitigations in place to cope.”

'Exploit the contractors'

Financially to cope, one of the UK’s largest aerospace and defence firms is asking its PSCs to pay for their own IR35 status review, so the firm can get its determinations free of charge.

“The IR35 situation here [is] being used to exploit the contractors to the tune of £150,” a PSC at the company said. “It’s not a lot in the scheme of things, but there’s a principle at stake.”

Other means which clients are resorting to include offshoring. In fact, the off-payroll study shows 47% of PSCs say their client is exporting work overseas thanks to the IR35 changes.

Ominously, almost as many (44%) say they believe that the overall impact of the legislative changes has not yet emerged at the organisation which they supply – or did supply.

'Contractors, agencies, accountants, then the economy'

But one ContractorUK reader is rapidly running out of clients. “I’ve contracted with three big companies in the past and their responses to the proposed IR35 regulations are as follows.

“Santander has moved my contract work to Portugal; HSBC has moved my contract work to Pune, India and GE has moved my contractor work to Bangalore, India.”

The reader added: “So this [reform] will not only hit contractors, agencies and accountants, it will also hit the UK economy, as work is being moved away. I sincerely hope the government halts it.”

'Two billion pound-wide productivity gap'

Accountant Mr Poyser, who calculates a £2.2billion productivity gap in the first half of 2020 purely from PSCs exiting their corporate projects, also wants to see a delay.

“Contractors would rather leave [work altogether] than move from outside to inside IR35 with the same client,” he said.

“So the sooner they [the government] revoke IR35 and run a full review on how it is implemented, the better. I can’t see how we will compete on an international stage post-Brexit otherwise.”

'The highly skilled, not gig workers'

In a letter published in the Evening Standard entitled ‘New tax will harm the whole country’, the chief operating officer of Bishopsgate Financial, Elizabeth Kent, seems to agree.

“Highly skilled interim professionals [are] far from the common perception of gig workers or freelancers,” she wrote.

“These workers bring a wealth of knowledge and ideas garnered at a variety of different organisations. These specialists help companies meet and surpass regulation, adapt to technologies and train permanent staff. 

“It will now be harder for companies to pull in this talent, adds expense and does not show post-Brexit Britain as being open for business.”

'Significantly more affected than HMRC's estimate'

Indeed, it’s a case of ‘closed for business’ for an Aviva PSC. “The insurer is using the CEST tool for individual assessment. Everyone is ‘inside IR35’ however, based on the answers.”

“There was no reference to individual working environments. So I have rejected a contract renewal and leave on February 25th -- with no other contract.”

Graham Jenner, co-founder of accountancy firm Jenner & Co reflected: “HMRC estimates [the IR35] changes will affect 170,000 people being those with contracts within IR35. 

“With end-clients blanket banning the use of PSCs across various sectors due to fears of liabilities, significantly more than 170,000 people are facing drastic and unnecessary changes to their livelihoods. When draft legislation has that effect, it is clearly wrong to introduce it in its current form.”