Crystal Umbrella

Tax avoiders and evaders alike have cause for concern as Her Majesty’s Revenue and Customs have dedicated £1billion – a quarter of the Budget – toward enforcement of the rules and coming down hard on those who break them. The investment is estimated to return a £2.4bn profit to HMRC.

However, even law-abiding and tax-paying contractors may have reason to worry, as the threat of investigation becomes much more of a reality. Limited company contractors are urged to ensure their business lies outside of IR35, and that all their tax affairs, dividends, payments, expenses receipts and other paperwork is fully in order.

The Professional Contractors’ Group told Contractor UK: “It’s legitimate for HMRC to enforce the law; our concern is that they tend to do it very badly, with destructive repercussions for innocent taxpayers.”

In an effort to end the out-of-court settlements, HMRC has pledged to pursue their cases through the courts until receiving whatever they feel is owed them. Also scheduled for application are new IT tools, expertise and penalties to identify and punish the guilty. IR35 adviser Bauer & Cotrell warned that IT contractors who fail to make their appeal after paying the tax demand following an investigation may be promptly blacklisted by the HMRC.

Contractors using offshore solutions should be especially careful, as many tax loopholes and avoidance schemes are targeted for elimination in accordance to the new HMRC business plan, which also promises to simplify existing anti-avoidance laws.

After a seemingly endless amount of pay cuts and a sector-wide rise of unemployment for contractors in the first quarter of 2009, recent findings show that job offers for financial IT contractors are on the increase, receiving a 100% boost in March.

According to financial staff screener Powerchex, the demand for contractors in the financial sector has increased steadily since the massive slump in December 2008, when work supply fell by 75%. January and February saw demand for IT contractors increase by 30% and 11%, respectively.

The news may seem a stark contrast to the job cuts suffered across the sector during March, but Powerchex’s Alexandra Kelly explained to Contractor UK that many financers have decided to return to development which had previously been shelved in an effort to cut costs at the end of last year, thus finding themselves in need of system developers. Another source of increase in IT contracts is said to be the Financial Services Authority who, in compliance to its many new regulations, also require IT systems to be developed.

Additional research by agents at Joslin Rowe shows the pace at which financial services hires staff has doubled since September last year, the least affected jobs being in the compliance, risk and audit roles.

“Tracking the time to hire of temporary staff is an excellent temperature gauge,” the firm told Contractor UK. “If temporary recruiting speeds up it’s a strong indication the market is on the turn.”

With intentions of highlighting the many and significant contributions made to the UK economy by freelancers, contractors and consultants, the Professional Contractors Group (PCG) has announced the launch of the first-ever National Freelancers Day, to be celebrated on 23 November this year. The day will be marked by special events in recognition of all key sectors within the contracting business.

Several key themes have been presented by the PCG to make clear on this day the place and importance of contractors in the UK economy, as well as to educate those outside the business about what a contractor/freelancer does and why people choose to engage in this type of work. These themes include the right of workers to pursue a career as freelancers; recognition of the freelance trade as a valid and respectable career choice; and the Government’s need to make the engagement of freelancers easier for employers.

The PCG hopes that the National Freelancers day will encourage people interested in becoming freelancers, as well as inspiring individuals and companies to consider hiring contractors, while also providing advice on the procedures involved.

John Brazier, PCG’s Managing Director, told Contractor Calculator: “PCG wanted to establish a special day for them and on National Freelancers Day we can recognise freelancing and celebrate the talents, achievements and worth of freelancers up and down the country…these events will bring together, and emphasise the importance of the UK’s freelance workforce.”

Contractors, umbrella companies, recruiters and end clients alike may find new business opportunities in the form of online networking with the launch of a new site which offers a multitude of business-related possibilities, including a feature which allows contractors to rate other contractors in ranking systems.

The site, freelancesupermarket.com, has been nicknamed a ‘facebook for freelancers’, mainly due to its similarity to the popular networking site in the use of addictive messaging systems. Its most unique feature is a contractor ranking system, the value of which is determined by the contractors themselves as they rate the abilities of their peers. These ratings allow recruiters to quickly find the most suitable candidate for the job.

Martin Smith, MD of freelancesupermarket.com, told Contractor Calculator: “We set out on this journey two years ago, with the idea of creating the UK’s first peer rated comparison website and online community of freelance service providers, and now it’s become a reality. It embraces the full potential of web 2.0 and will revolutionise the way recruiters and contractors interact with each other.”

As recruiters are able to use the site as well, contractors have the lucrative option of simply waiting for job offers, having made information about their skills and services readily available for anyone who would need it. In addition to networking services, the site also features informative content such as reviews of umbrella companies and accountants, contractor blogs and general advice for freelancers.

According to a recent report, the number of IT staff currently employed is the highest for over seven years. However, current low demand is yielding fewer and fewer vacancies for contractors in the same sector. The Office of National Statistics counts 27,000 technology professionals currently unemployed in the UK.

The report, conducted by sector skills council e-skills UK, shows that ads for permanent jobs have fallen by 24%, and contractor jobs by 27%, over the last six months of 2008. Positions available for freelancers in the IT sector have fallen across all disciplines, with the largest fall in demand being for programmers, system designers and software engineers, each down by approximately 30%.

For guidance, the report recommends IT professionals and contractors alike to expand their skills into areas of technology which have continued to show a rise in demand, such as WAP, COM, Active and Sage, as well as programming environments like SQL, C, .NET, ASP, Java, Oracle and Unix.

“To us here at e-skills UK it would seem prudent, if you are in work, to bed down and make the most of what you’ve got,” the report states, “particularly in the contract market – after all, job openings are comparatively few and far between at the moment.”

Conclusively, the report emphasises that even though the current recession and slump in employment in the IT sector is difficult for many, the market looks considerably better now than it did in the early part of the decade.

Wednesday’s Budget offered no dramatic changes for contractors, with the notable exception of those with high incomes, who will face restrictions on pension contributions and possibly higher income tax. Some agendas, like the call to terminate IR35, as well as several issues regarding umbrella companies and expenses, were notably absent from the Chancellor’s Budget.

Contractors who might potentially benefit from the budget changes include those active in the energy sector, as a range of measures were announced to support North sea oil and gas extraction and exploration, as well as funding and support for renewable energy schemes. Small businesses may find their corporation tax returns simplified, if the government decides to implement initiatives to that effect outlined in the Budget. Additionally, the previously announced rise of corporation tax to 22% will not happen, and it will remain at 21%.

The only contractors who will be decidedly negatively affected are those with an annual income in excess of £100,000, who will face restricted relief on their pension contributions as well as seeing their ‘tax-free’ allowance of £6,475 being reduced to zero; and those earning over £150,000 per year, who will additionally pay 50% income tax from 2010.

Some experts expressed criticism of the Budget’s lack of detail as a possible excuse to re-introduce schemes now deferred, as well as the Chancellor’s apparent refusal to address the IR35 issue. However, as it stands the majority of contractors will remain largely unaffected by the new Budget and have no cause for concern.

Following an alarming trend within big companies, Electronic Data Systems has confirmed that IT contractors within their workforce will have their pay reduced by 10% – a figure not subject to negotiation.

The pay cut announced earlier this month to the freelance IT suppliers at EDS is the latest measure in an ongoing economic plan designed in September last year. Already 3,000 people have been made redundant within the company workforce and contractors who do not agree with the pay cut will face termination upon renewal.

Part of the blame has been placed upon Hewlett Packard and their decision after the takeover of EDS to reduce its combined workforce by 24,600 as part of their three-year restructuring plan, predicted to save the IT giant £1.8bn a year. Union estimates at the time of the acquisition saw one in five EDS contractors losing their jobs, and now it appears the prediction has become reality.

In addition to the pay cut, further measures to reduce company costs include an invitation from EDS to its staff and contractors for a week off without pay. Staff salaries and pensions are also affected.

This is one of the latest examples of how large companies’ plans for cost reductions result in reduced pay and unemployment for IT contractors. BT announced earlier this month that they would be reducing IT contractor pay by up to 30%, and Toshiba said it would eliminate 3,000 temporary roles by March 2010.

STATEMENT FROM EDS, AN HP COMPANY – 23/04/2009

EDS does not have a direct relationship with its contractors around pay and contracts. Rather, it works with a group of suppliers and it is these suppliers who determine the pay rates and contracts for their employees. Therefore the assertion that EDS has enforced a blanket 10% pay cut for its IT contractors is misleading.

It is standard business practice in EDS and HP to continually evaluate the competitiveness of all of our suppliers and we are in constant dialogue with them. We do this to ensure a world-class cost structure, which allows us to deliver a best value, high quality service to our clients.

As the recession intensifies, like many companies, we are looking at our costs and are intensifying our efforts to get the best possible value from our suppliers. As a consequence, our suppliers are willing and able to offer greater flexibility and more competitive rates.

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Despite their pay and demand figures waning at present, IT contractor’s overall long-term unemployment is currently 7.5%, down from 13% in 2003, a recent report shows. The report, delivered by Giant Group, also shows that IT contractors are currently prioritising steady employment over higher earnings.

Matthew Brown, managing director of Giant, told Contractor UK: “With rates in some sectors having been cut, contractors are clearly still concerned about job security and whether…the market still has some way to fall.”

Following the dotcom crash six years ago, nearly 1/4 (24%) of contractors at the time said they thought their next assignments would come from out the financial services sector, while 13% showed faith in the public sector. According to the report, these figures are today virtually reversed, with the public sector providing a great hope for 1/3 (30%) of contractors, and a mere 15% showing faith in the financial services sector.

“Demand for workers in the public sector is usually much less volatile during a recession than the private sector,” said Brown.

While the general jobs market is said to be in its worst state for 11 years, with hourly rates for temporary roles continuing to fall last month, the report also provided good news for IT contractors, as it showed demand for freelancers in the IT sector was stronger last month than it was for permanent staff, this led by a shortage of full-time developers and freelance CNC programmers.

In accordance to new advice put forward this year by HMRC, contractors who operate through their own contractor limited company must now complete a P35 Employer Annual Return for submission to Revenue and Customs by 19th May of this year, or be faced with an automatic penalty.

The new advice (on page 18 of HMRC’s Employer Helpbook E10) serves as an amendment to the new question 6 that was introduced last year, which asks ‘Are you a Service Company?’, to which the contractor is advised to answer ‘yes’ if:

• “An individual performed services (intellectual, manual or a mixture of the two) for a client or clients, and
• The services were provided under a contract between the client and the company of which, at any time during the tax year, the individual performing the services was a shareholder or partner, and
• The company’s income was, at any time during the tax year, derived wholly or mainly (that is, more than half of it) from the services performed by the shareholders or partners personally.”

This would make the role of ‘service company’ applicable to largely any contractor who operate in limited companies. This may cause complications and unwanted investigations as it is likely contractors who last year ticked ‘no’ to question 6 will now tick ‘yes’, and vice-versa, which could leave potentially hundreds of thousands of contractors open to compliance checks from HMRC to ensure their contracts are outside of IR35.

Like many firms have been forced to cut back on contractors due to the grim economic climate of present, BT is now due to reduce the pay of the freelance workers in its IT services unit by up to 30%, it emerged after the company announced an across-the-board pay freeze for its 100,000 staff, including directors.

The pay cut follows apparent disappointment in the performance of BT Global Services, which was supposed to power BT’s growth, but instead failed to live up to what recession has made apparent to be over-optimistic profits projections. During the past few months, 6,000 contractors within the group has already been made redundant, and those remaining are now faced with pay cuts to compensate for the 81% slump in third quarter profits blamed on the performance of the unit.

A BT spokesman confirmed the situation on the Friday: “BT Global Services has asked some of its contractors to accept lower rates of pay.”

“This is part of the ongoing cost-control programmes at BT. We believe this review will ensure contractors are paid according to the currently appropriate market rates. Many of our competitors and other large organisations have carried out similar exercises; this is not unique to BT.”

Other measures already taken by BT to reduce company overhead costs include changes to the company pension scheme – the biggest in the UK – which involved raising the retirement age to improve the fund’s financial position.