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Need for flexible workers in financial services

Victoria Walmsley, Managing Director at Morgan McKinley, weighs up the impact of a flexible workforce can have in financial services and how future changes in IR35 will cause unintended consequences despite the year’s delay in implementation caused by the Covid-19 crisis.

Victoria Walmsley

April 2020

Contractors have made up a significant portion of the workforce within financial services. While the exact statistics are hard to find, many large organisations outsource their contingent workforce hiring to an intermediary highlighting the need for a specialist approach. One of the larger UK banks advised that in 2019 it had over 8,000 contractors working via personal service companies (PSC).

The need for an interim or contractor stems from the need to have a flexible workforce with specialist skills for a specific piece of work. In particular, where regulation, product development and technology evolve at pace, the need and demand for subject matter experts trumps the requirement for generalists.   

There are few areas without contractors, as there’s been a demand for flexible resources: workload, projects, maternity leave, sickness or cover for permanent hires. Projects have used the most number of contractors to deliver with entire teams of professional contractors as the end business neither wants or needs permanent employees.

Impact on the marketplace of IR35

There is significant short term pain for those involved in the supply chain. Last year’s Brexit uncertainty combined with IR35 changes, caused a reduction in contracts being extended and new contractors taken on.

While none of us condone tax avoidance, these changes are hard to support with unintended consequences through the supply chain, especially with tax liability sitting with the fee payer, often the recruitment company which in most cases hasn’t even been involved in the determination.

For the end clients, they are being asked to make a status determination for every role and current contractors, which may seem an administrative exercise. But for the company with over 8,000 PSCs, it was unrealistic to be able to deliver on an individual assessment and combined with the risk transfer of making an incorrect determination or being challenged on ‘reasonable care’ that’s a hot potato that’s easier to avoid.

Like many other large corporations, this bank has made a policy decision to no longer engage PSCs, irrespective of whether the contractor actually does sit outside IR35.

So, the options for contractors are: convert to permanent employment, work via an umbrella company or move to PAYE (often there is no option to work via a PSC ‘inside’). All have cost implications and few clients want the outcome to be anything other than cost neutral - so where do those costs go? Down the supply chain!

Dealing with various companies, we have seen those who moved early and have had policies in place since last year and then there are those who are not ready for go-live. We’ve heard feedback, but the most consistent one is the frustration that HMRC’s own Checking Employment Status Tool (CEST) is not delivering clear outcomes.

It would be easier if it was at least a Hobson’s Choice, but for some it’s just no-man’s land.

For now, we see fewer contract roles, contractors converting to work PAYE on lower rates and a conversion of contractors to permanent employment on lower packages, creating workers who are aggrieved and disgruntled - and troublesome to manage!

If we look at what happened in the public sector, there was a quick bounce back. The need for a flexible workforce won’t go away and the demand from individuals to have a more flexible work life is on the increase; this gives good reason to believe that the private sector will bounce back if and when IR35 is finally implemented.

Victoria Walmsley is Managing Director at Morgan McKinley.

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