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18th Feb, 2020

Tom Abbitt
Tom Abbitt
Job Title
Area Manager

Many of the banking giants have made a decision to no longer engage with PSC contractors ahead of the IR35 private sector reforms. This could have a huge impact on the industry, and the self-employed.

The off-payroll legislation, also known as IR35, is designed to ensure that contractors operating under Personal Service Companies (PSCs), who are doing the same role as an employee, are paying broadly the same tax.

Currently, the responsibility lies with the contractor to declare their tax status. However, from April 2020, medium-to-large private sector organisations will assume the responsibility for determining whether a contractor should be taxed the same as employed staff. 

Using HMRC’s CEST tool, businesses can assess if a role falls ‘inside’ or ‘outside’ the regulations. If a contractor is deemed as inside regulations, they are effectively doing the same role as an employee and therefore should pay a similar amount of tax. Genuine contractors, not doing the same role as an employee, would be classed as ‘outside’ IR35 regulations and their tax status will remain unaffected.

IR35 reforms for the public sector were launched in 2017, and have - in the eyes of HMRC - proven successful, creating an estimated £425m in tax revenue. HMRC expects private sector changes will bring an additional £725m in tax.

In anticipation of these changes, many of the banking giants are starting to phase out PSC contractors altogether.

Lloyds, Barclays, HSBC and RBS are just some of the banks that have made the decision to no longer engage with contractors who operate through a PSC. This will likely be replicated by many other banks, at least in the short-term, until there is a clearer understanding of the impact of the reforms and the likelihood of tax liability claims.

This move by many of the major banks is designed to completely remove any risk of tax liability. Contractors will have to either become a PAYE employee, switch to an umbrella company, who will take control of their payroll via an agency, or not renew their contract.

What could this mean for the banking industry?

The decision to not employ PSC contractors seems to be a knee-jerk reaction, and could cause considerable damage to businesses. The self-employed are extremely valuable to the economy, providing flexible and specialist knowledge.

Many banks have had to review contractors’ roles to determine if they fall in line with business needs. If they do, they have been conducting one-to-ones with their current contractors to discuss whether they will want to stay on as an employed member of staff, choose to be paid through an umbrella company, or not renew their contracts at all.

Contractors will likely see a large pay cut if they become PAYE employees, and many may be reluctant to renew their contracts under those circumstances. There are many benefits to a PAYE contract, notably holiday allowance, sickness pay, and job security. Contractors will have to decide if these perks are enough to compensate for reduced take-home pay.

Those that have skills that apply to multiple industries may move out of the banking sector altogether. However, contractors with specialist banking knowledge could find themselves out of work if they do not agree to a PAYE scheme. If the business cannot justify making all contractors PAYE employees, it is likely that certain roles where banks appoint genuine contractors will be removed completely.

It’s not yet clear what impact this will have on the industry, but it’s safe to say contractors play a big part in the banking industry. We are almost definitely going to experience skills shortages and subsequently, a talent drain in the market.

Hopefully, this decision will only be a short-term reaction to the IR35 reforms. Even if banks do find a different solution, large tax liability claims will still alarm them, making them less likely to engage with contractors in the future.

There is also mistrust towards the HRMC CEST tool, which assesses whether roles lie inside or outside of IR35. Organisations are reluctant to take any risks on liability until we see the likelihood of tax claims and the impact of the reforms in practice.

Businesses need to seek advice on IR35 regulations in order to effectively make low-risk determinations without missing out on the valuable skills that contractors provide to businesses.

If you are looking for your next banking role, or a talented professional, contact your local Reed office.