]]> https://www.artemisfinancial.co.uk/group-regulatory-and-reporting-manager-2/feed/ 0 https://www.artemisfinancial.co.uk/is-losing-your-contractors-worth-it-for-the-long-term/ https://www.artemisfinancial.co.uk/is-losing-your-contractors-worth-it-for-the-long-term/#comments Thu, 05 Dec 2019 12:04:28 +0000 http://www.artemisfinancial.co.uk/?p=2037 Find out more...]]> December 2019

Gradually throughout the year more and more companies have set the precedence for incoming IR35 reform by confirming that they will not be engaging with contractors regardless if they are considered outside IR35. Banks and financial companies alike all seem to be following suit.

For contractors working with RBS, Tesco Bank, Barclays, Lloyds and Morgan Stanley the future points towards being put onto the payroll before the reform is introduced on 6^th April 2020. The most likely outcome for contractors being put on the payroll through an umbrella company.

These companies are reportedly giving contractors no option but being paid via PAYE to avoid IR35 reform altogether. IR35 rules do not apply to contractors working through umbrella companies nor employees. Furthermore, HMRC will not dispute engagements in which independent workers are operating inside IR35.

This cautious strategy may not pay off however and could potentially pose a greater threat to private sector firms by scrapping all outside IR35 contractors. From where we’re sitting it may be a risk not worth taking, for the following reasons…

Potential skills shortage

Most contractors would prefer to continue working independently and outside IR35, so giving contractors an ultimatum to go PAYE or leave could mean private sector businesses risk losing their highly skilled, and sometimes irreplaceable, contractors if they decide to leave the contractors no choice.

From our work with over 100 businesses and recruitment agencies we have concluded that there could potentially be tens of thousands of opportunities for contractors wanting to carry on working outside IR35 like before. We are all unsure of how big of an impact the reform will really have but it may not be all doom and gloom for those wanting to maintain higher day-rates.

Significant cost implications

If the risk of losing your superior talent isn’t enough, shifting contractors onto the company payroll is a costly process, without even considering the overall costs of employment. If businesses opt for turning their genuine contractors into employees the cost of paying employer’s National Insurance Contributions is reason enough to re-think, especially for companies with hundreds/thousands of contractors. In addition to this, the various other expenses of employees run the total up higher than you think. Office and equipment costs, sick pay, holiday pay and paid maternity or paternity leave.

For hiring organisations who depend on keeping their finest contractors may often have no choice but to offer great employment contracts. Company cars and other employee benefits are often a way of making up for the money contractors will be losing out on.

In simple terms, although independent day-rates might seem more expensive to companies, a lot of the time hiring a contractor outside IR35 tends to be cheaper.

Administrative burden

With greater costs being taken into account and also the potential skills shortage, there is then the burden of putting thousands of contractors onto the payroll. Not only that but looking after these workers in line with an employer’s HR obligations.

While private sector firms might argue that assessing each and every contractor’s IR35 status is an intimidating job, in contrast to onboarding thousands of employees, it is at least a one-off task assuming that the details of the contractor’s engagement remain the same. 

Restricted business agility

The most valuable part of using contractors is the unrivalled flexibility they provide businesses. Private sector firms can engage contractors as and when they need them with not many strings attached. This is extremely helpful in handling fluctuations in demand. The ability for firms to scale their workforce to their will should not be underestimated and employing contractors in permanent positions will eliminate that benefit.

Only time will tell as to whether these financial services firms rethink their position. There is, however, at least one thing we are confident in: that IR35 reform is manageable and Qdos are engaging with many hiring organisations looking to ensure fair assessment of their workers.

Find out more about IR35 reform in the private sector

Lloyd’s performance management director Jon Hancock has said he expects the market to shrink for the next two years, as the Corporation takes a tough stance on underperforming lines of business.

Speaking at the Association of Lloyd’s Members national conference yesterday, Hancock said the market needed to change what it is doing to improve underwriting results.

“I expect the market to shrink this year and to shrink next year,” he said. “Premiums must surely reduce if performance is going to notably improve. Doing the same just cannot be an option for syndicates and portfolios which are underperforming.”

Doing more of the same can only be an option “if you are performing really well or outperforming the market”, Hancock added. “The market cannot simply grow exposures to maintain premium.”

Lloyd’s does expect some syndicates to grow, but only if they are doing something different, the executive added.

“That could mean a new product, a new proposition, a new acquisition or a new footprint. We will support those profitable sustainable plans. But overall, we expect the market to shrink in these competitive conditions,” he said.

Monitoring market growth is one of five key areas the Lloyd’s performance management team is focusing on to turn around the market’s results, with accident-year loss ratios in all segments running above 100 percent.

Other areas of focus include catastrophe exposures, facilities, operating expenses and acquisition costs.

Lloyd’s typically writes 8 percent less premium than its allotted stamp capacity for the year, the executive explained. In 2016, the market wrote 12 percent less than its stamp.

“That is a good sign of some discipline,” Hancock said. “It is good – it is essential, in fact – that managing agents are making those tough decisions.

“We are entering a Darwinian phase where only the fittest will survive.”

Some in the market believe that Lloyd’s needs to see some failures, and record large losses, in order to maintain the health of the overall market.

When questioned on his viewpoint, Hancock said Lloyd’s had a duty to ensure the market does not enter a period of sustained losses or low returns.

“That has an impact on reputation, on the Central Fund, on credit ratings etc,” he said. “Syndicates need to stand on their own two feet. The weakest won’t.

“We need to put a really safe environment around [the weakest syndicates] so that policyholders, the Central Fund and the mutuality of Lloyd’s is protected.”

The Corporation is enforcing a risk-based approach to its market oversight, and will focus its attention largely on underperforming syndicates.

“I can assure you that a new risk-based approach means we identify poor performers much earlier,” Hancock said. “We can intervene much faster and harder when we need to.”

Lloyd’s will restrict or remove authority when syndicates start to underperform or diverge from their approved business plans, he continued.

“We will not allow syndicates to begin writing business we don’t believe they have the capability to, or where we have evidence that the market just cannot write it successfully,” he added.

“This also means we will spend less time on the best performers, so they have more time to focus on running their businesses. We will leave them to work harder for their returns.”