Crystal Umbrella

Contractors working for umbrella companies or via their own limited companies will be heartened by a recent announcement by Cabinet Officer Minister, Francis Maude. A long-standing two-tier arrangement governing payroll outsourcing in the public sector is to be abolished with immediate effect.

To be more precise, the Code of Practise on Workforce Matters in Public Sector Contracts – a set of regulations which has governed public sector arrangements for years – is to be placed on the legislative bonfire. The government believes that the code has served chiefly to relegate service providers external to the public sector to a Cinderella status, privileging an “in-group” which may not necessarily have been the most cost efficient or the most skilled. In these deficit reducing times, such conventions are coming under gimlet-eyed ministerial scrutiny.

In one fell swoop, rules which have hindered small and medium sized companies, social enterprises, charities and co-operatives alike from playing a fuller part in running public services will disappear. Mr Maude claimed that the shredding of the code is designed to deliver better value for money for taxpayers, not least by encouraging greater competition in fields such as payroll services.

He went on to clarify that the reform will not affect the existing provisions laid out in the Employment Act 2008 or rules pertaining to the Transfer of Undertakings (Protection of Employment) legislation. Public bodies will also continue to be obliged to promote equal opportunities and eradicate unlawful discrimination.

Contractors working for limited companies and umbrella companies should by now be aware that VAT is set to rise next week from its present rate of 17.5 per cent to 20 per cent. The change comes into effect on midnight on the 4^th January.

It’s as well to be clear, though, about exactly which items will be affected. Only those items which are charged at the standard rate of VAT will be subject to the increase. Goods and services which had hitherto been rated at zero, reduce rated or exempt from VAT will continue to be unaffected.

This might seem relatively straightforward on the face of it but a small business group has recently issued a warning to smaller enterprises that matters can easily become more complicated when the distinction is put into practise. The Forum of Private Business (FPB) has drawn attention to the way in which the VAT rise may affect accounting systems. Accounting systems will need to be altered in line with the VAT change so that invoices, sales records and transactions will be issued at the new rate from 4^th January onwards.

The FPB’s Chief Executive, Phil Orford, explained that outstanding invoices for work or services genuinely carried out before the deadline can till be charged at the 17.5 per cent rate after 4^th January, but for most small businesses, a new standard VAT code will need to be created for the 20 per cent rate. The previous code may also need to be retained for the outstanding invoices.

Freelancers working for umbrella companies should find that these adjustments will have been made by their firm, but those working for limited companies may be pleased to hear that HMRC will be taking a “light touch” approach with any errors in the first VAT return after the change.

A good deal of anxiety has been circulating in recent years about the prospects of an HMRC clampdown on umbrella companies – fears which, if anything, have gathered momentum in the wake of the austerity measures announced by the Chancellor to tackle the UK’s eyewatering budgetary deficit. However, according to a leading tax expert from the international law firm Osborne Clarke, such worries are almost certainly far in excess of the reality.

Kevin Barrow, a partner in the law firm, was addressing the Association of Professional Staffing Companies when he made his remarks. He added that PAYE umbrella servicer providers don’t simply support large numbers of contractors in the UK’s freelance community, they “perform a valuable, practical function” for HMRC, too.

Were it not for the efforts of umbrella companies, Mr Barrow continued, tax revenue which is now efficiently collected by them for HMRC might simply disappear into the black economy. Any freelancer who chooses to work for a PAYE umbrella company will pay income tax and will also be protected against IR35 liability. HMRC benefits from a guaranteed source of revenue and simultaneously avoids the necessity for convoluted and expensive IR35 investigations.

HMRC may decide to tighten the screw, however, in specific areas such as overarching contracts of employment and “artificial” employment contracts. For most contractors working for well-run, bone-fide umbrella companies such as Crystal Umbrella, however, any clampdown in these practises will be of no relevance.

Contractors working for umbrella companies and limited companies gathered in Warrington earlier this month to give input to representatives from the Office of Tax Simplification (OTS) on impending changes to IR35 legislation.

In a workshop organised by the Freelance and Contractors Services Association (FCSA), contractors gave detailed explanations to OTS staff on their way of working and expressed frank concerns about potential changes to the tax system. Commenting on the event, FCSA’s chairman, Stuart Davis, said that his organisation’s members spoke freely, welcoming changes to the cumbersome IR35 legislation but also expressing concerns about continued uncertainty over how the new tax regime will affect the flexible workforce.

The workshop was hosted by Brookson, whose Managing Director, Martin Hesketh, also contributed. He said that many UK contractors know from experience that IR35 has been a “major headache” – its lack of clarity has made it exceptionally difficult for people to clearly determine whether they are captured by it or not.

By driving contractors to protect their self-employed status so as to ensure that they are not inadvertently caught by this legislation, they are often forced to do things “that are not helpful or supportive of the clients they are providing their services to.” He cited refraining from joint training activities and slowing down their response to client requirements in order to make sure that the appropriate documentation was in place.

As things stand with IR35, Mr Hesketh continued, contractors bear all the risks and employers and agencies bear none. He was speaking to the industry news outlet, Shout 99.

Contractors working for either Umbrella Companies or Limited Companies are all too aware that future work prospects depend on economic growth. Most will know that the Office for Budget Responsibility (OBR) lowered its growth forecast for the UK’s economy in 2011 recently from 2.4 per cent to 2.1 per cent. Now the Confederation of British Industry (CBI) is adding its voice to the chorus of other predictions suggesting that growth next year will be slower than projected earlier in 2010.

In the first quarter of 2011, the employers group predicts, growth will increase by just 0.2 per cent, a fall from the 0.3 per cent the organisation had previously anticipated. Overall, the economy will grow by 2.0 per cent per year, reaching 2.4 per cent in 2012.

The first few months of 2011 are likely to be especially sluggish, however. The CBI believes that consumer spending will inevitably be adversely affected by the government’s hike in VAT charges, a move which it anticipates will diminish growth to 0.2 per cent quarter on quarter.

Commenting on the forecast, the CBI’s chief economic adviser, Ian McCafferty, noted that the UK economy had experienced unusually strong growth during 2010 which had exceeded expectations, especially since this was the first year out of recession. But such a pace is not expected to continue over the next two years, as spending cuts and VAT rises work their way into the economy.

Anticipating the VAT rise, which comes into effect on 4th January 2011, the Professional Contractors Group (PCG) issued advice in September to contractors and other small businesses on how to prepare for the increase.

Those on the contractor payroll in the IT skills market could be in for a bumper year in 2011, if a new study from the Centre for Economics and Business Research (cebr) proves accurate.

According to the research, well over 90,000 new employment openings will be created between 2011 and 2015 in the IT services sector, news which should bring some seasonal cheer to professionals in the IT contracting community. Not to put too fine a point on it, cebr predicts that the IT sector will be the “stellar performer” as far as forthcoming job creation is concerned.

More precisely, cebr’s research has uncovered trends which will result in an annual growth rate of 5.1 per cent up to 2015, a development which will bring in its wake 93,000 new jobs if it comes to fruition. Commenting on the study, cebr’s chief executive, Douglas McWilliams, said that for many other areas of the business services community, the outlook is still bleak. But if the government and the private sector both choose to make more use of external procurement, prospects for growth may improve. By adopting this approach, projects can be completed with none of the additional long term costs associated with hiring permanent staff. Clearly, IT professionals working for umbrella companies and limited companies could be the principal beneficiaries of such a strategy.

The findings are in line with the recent “UK IT Service Provider Performance Study” for 2010 conducted by EquaTerra, which indicated that outsourcing may be increased by as many as 61 per cent of British firms in the near future.

Mixed reports continue to emerge regarding the state of the UK economy, upon which rest the fortunes of the country’s contractor workforce. According to the latest report, however, people working through umbrella companies and limited companies are unlikely to see any discernible pick up in job prospects until well into 2011.

The Chartered Institute of Personnel and Development (CIPD) was actually referring to the latest official labour market statistics released this week by the Official for National Statistics (ONS). We reported yesterday on these figures, which revealed that unemployment rose slightly during the three months to October, reaching its highest level for six months at 7.9 per cent. According to the CIPD, this amounts to “no joy and very little comfort” for all jobseekers hoping for new opportunities in the pre-Christmas jobs market. The Chief Economic Advisor to the organisation, Dr John Philpott, went so far as to suggest that the stats were “far worse than expected.”

By contrast with the positive momentum which had been seen in the early part of 2010, Dr Philpott continued, the latest figures indicate that this has “run out of steam” even before the coalition’s tax hikes and spending cuts have fully hit the economy – a development which, in his opinion, does not bode well for next year.

Dr Philpott did note a crumb of comfort – there was a tiny increase in job vacancies during the period recorded by the statistics, and a slight fall in the number of people claiming job seeker’s allowance. His comments are in marked contrast to those of the British Chambers of Commerce (BCC) which regarded the same figures as disappointing but no cause for despondency. According to the BCC, the long term trends are for a strong labour market.

PAYE umbrella contractors may be intrigued to consider two recently published reports which offer apparently contradictory views of the UK’s jobs market. The Office for National Statistics (ONS) has just released its latest figures for the UK’s employment rate in the three months to October 2010. Unemployment grew by 35,000 to reach 29.13 million, hitting its highest rate (up 0.1 per cent to 7.9 per cent) in six months. Much of the job losses (around 33,000) were sustained by the public sector as a result of the government’s deficit reduction measures. On a more positive note for contractors working through umbrella companies, the figures also showed a rise in part-time employment of 26,000 – a number which is likely to include self employed workers.

The British Chambers of Commerce issued a statement saying that the figures were “disappointing” although not a cause for despondency. Longer term trends still suggest a strong labour market this year although the economy still faces challenges in the months ahead, the BCC continued. This is in line with projections from the Office of Budget Responsibility (OBR), which suggest that unemployment will fall in 2012 as private sector job creation begins to more than offset public sector losses.

The latest meeting of the Recruitment and Employment Confederation’s Technology Group, however, offers a more upbeat picture for contractors working in the IT skills market. Recruiters in the sector have noticed a rise in recruiting activity and have a “more upbeat” outlook for 2011.

An industry expert is predicting a rise in payroll outsourcing amongst many firms in the New Year, a development which could benefit contractors working for umbrella companies.

The leading recruitment outsourcing firm, hyphen, believes that more organisations will make greater use of outsource solutions next year, as part of the drive to improve standards and lower costs.

Zain Wadee, hyphen’s Director, anticipates a likely growth in outsourcing deals in the international recruitment process. Companies are looking to “leverage increasing mobility” as well as striving for consistency of practise, he said. Mr Wadee also believes that contractors working for umbrella companies could take advantage of the expected trend in recruitment process outsourcing (RPO), because it’s likely to be carried out across a broad range of services, covering areas well beyond normal talent acquisition.

The recruitment agency’s forecast comes hot on the heels of findings from a recent study commissioned by PricewaterhouseCoopers. This suggested that outsourcing could help offset job losses in both the public and private sectors in the near future. Moreover, the PricewaterhouseCoopers study also indicated that the rise of cloud computing and virtualisation would give small businesses the IT capabilities of much larger organisations. This is a development which is likely to be of considerable benefit to the small UK freelancer – companies using flexible supplies can create many new freelance opportunities with this technology in place.

A new amendment to the Income Tax Earnings and Pensions Act of 2003 will close a loophole which some freelancers on the contractor payroll may have used to avoid or defer income tax or National Insurance Contributions (NICs). Henceforth, HMRC intends to tackle all arrangements, including trusts, that are aimed at offering tax-advantaged alternatives to saving beyond the allowances permitted in a registered pension scheme.

The government has been alerted to the fact that some third party arrangements seek to disguise remuneration by claiming that an employee has no legal right to a sum of money under the structure of the agreement, when in fact he or she may be enjoying the full benefits. The targeted arrangements seek to argue that NICs and income tax will only be due on the sum provided during the employment period, rather than on the full value of the assets.

The new legislation will come into effect on 6th April 2011, and aims to ensure that – other than specific exemptions – all rewards, recognitions or loans earmarked for an employee’s benefit, whether current, former or prospective, will be eligible for income tax and national insurance contributions. The exemptions include registered pension schemes, ordinary commercial transactions and approved employee share schemes. The HMRC website contains an explanatory note as well as details of the draft legislation.

Contractors working for a PAYE umbrella company may be unaffected, but other freelancers may wish to consult a qualified contractor accountant for advice.