If you're a permanent employee of an investment bank and are struggling to come to terms with a 10% drop in your bonus, count yourself lucky. Contractors serving the banking sector are having to deal with far worse.
Computer Weekly reported last week that Bank of America told UK contractors in December that it would be phasing them out if they work for limited companies in advance of the IR35 tax reforms coming into force in April 2020. It is far from the only bank to do so: HSBC stopped using limited company contractors in September 2019. Barclays did the same last October, as did Lloyds. Things are, however, going from bad to worse.
How IR35 killed the contractor market
In the UK, contractors - who typically work on technology and regulatory projects for investment banks - have historically been able to register themselves as limited companies and to receive more favourable tax treatment.
However, the British government is clamping down on this with a move to shift the responsibility for determining whether a contractor is really a contractor (or actually an employee in disguise) to employers from April 2020. If contractors are deemed to be employees, employers will then be required to pay 13.8% of their historic 'salary' in employer's National Insurance. Over time, this could turn into a significant liability. Banks don't want to run this risk.
Banks forcing contractors to become employees
Dave Chaplin, CEO of ContractorCalculator and IR35 Shield, said there's been a proliferation in the number of banks issuing blanket bans on limited company contractors ahead of the April deadline.
Many banks are simply pressuring contractors to become permanent employees. "Contractors do not like it," says Chaplin. "You have to remember that many self-employed contractors relish the challenges of moving between projects. Many of them travel around the country, and if they are put on payroll, they will need to charge considerably more to cover their expenses."
Contractors say they're being unnecessarily squeezed. "We are either being forced to go on payroll, or to work under an umbrella company operation," says one senior contractor with a long history of working on regulatory projects in the City of London. "However, to get an equivalent rate of take home pay, we would need to raise our rates by between 18% and 25% - which I don't imagine is something banks have taken on board."
Internet forums are filled with complaints from contractors given no choice but to become employees. Deutsche Bank is said have compelled current contractors to become PAYE employees with a 45 week tenure restriction starting last Monday (27th). Lloyds is said to be compelling all would-be contractors after January 31st to join the payroll. JPMorgan is said to be doing the same from April.
Earlier this month, HSBC is understood to have taken the stringent decision to also ban consultancies (eg. KPMG and other Big Four firms) from supplying it with contractors who have their own limited companies - thereby removing an opportunity for contractors to maintain the status quo. "With HSBC setting the tone here, the fear is that other banks will follow," one contractor told us. "They're basically shutting off the back door."
Deutsche Bank and HSBC didn't respond to a request to comment. JPMorgan declined to comment.
Reduced rates, poor communication
Computer Weekly says Bank of America's contractors are being held in limbo while they wait to find out what their new terms will be. BofA declined to comment on the article, so it's not clear what's coming next. However, it may not be its contractors would wish for.
Across most banks, from HSBC to Barclays, contractors claim that their shift to become employees is being made 'cost neutral.' While they gain the benefits of full employment (sick pay, pensions) they are therefore experiencing cuts to their day rates of up to 25%.
One banking contractor says he was being converted to PAYE at an hourly fixed rate of 35 hours: "This rate isn’t nearly equiv to outside IR35 day rate even including hols. Effectively c27% pay cut."
Another complains of feeling, "Depressed, victimised, exploited."
Contractors threaten to work elsewhere
With so many contractors unhappy, some are threatening to take their expertise elsewhere, or simply (if they can afford it) to retire.
"Contracting has been about what works with my lifestyle," says one experienced banking contractor. "I have better things to do than to take a demanding and uninteresting job on a PAYE basis. However, if you're in your 30s or 40s you may have to knuckle down."
Various contractors say banks risk jeopardising existing IT and regulatory projects as disgruntled contractors disappear rather than accepting new punitive terms and joining the payroll.
"The sheer number of contracts on site would mean a lot of projects would need to be mothballed if they decide to go PAYE. I don’t think this is an option with the regulatory scrutiny that is present from around the globe," says one.
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