Contractors can look forward to a 2015 rich in opportunity and increasing demand for their services. The ongoing growth of the contracting sector means the flexible workforce will become an important independent constituency and a key battleground in the forthcoming election.
However, whichever government gains power, it will focus relentlessly on tax avoidance that will inevitably place traditional contracting trading models in the spotlight, and perhaps under threat of anti-avoidance measures. There are several niche areas of taxation set for review that are likely to survive any change in government and could impact adversely on contractors.
Within contracting, as more disillusioned employees, graduates and women choose the contracting lifestyle, compliance and service standards will become increasingly important as the marketplace becomes crowded.
And the outlook for core contracting disciplines, such as IT, engineering, construction and finance, is very positive. Skills shortages are expected to worsen as demand increases, providing opportunities for contractors as well as elevated rates.
What impact will the election have on contractors?
Simon McVicker, director of policy and external relations at the association of Independent Professionals and the Self-Employed (IPSE) predicts that self-employment will continue to rise and the politicians will have to take more time to address the policy implications around it.
But this attention may not all be positive. McVicker explains: “Due to the budget deficit and low tax receipts, whoever is in government will launch a huge campaign against tax avoidance. This does mean the personal services company (PSC) model and issues such as travel expenses will be under extreme pressure, which really means we will need to see a review of the tax system in the long run.”
“The general election is looking messy at the moment and may be so inconclusive that no stable government can be formed and we will be looking at a second election,” he adds.
James Abbott, founder and head of tax at contractor accountant Abbott Moore believes that the election won’t stop existing measures planned to tackle perceived tax abuses: “Areas such as entrepreneur’s relief may be reviewed and there are real mixed messages on red tape, with some areas becoming relaxed and others tightening-up. These are departmental driven policies so likely to survive any change in government.”
Contractor numbers will increase
“With the economic recovery looking increasingly secure, most businesses and individuals will head into 2015 with a degree of confidence that we haven’t seen for many years,” highlights Derek Kelly, managing director at Parasol and ClearSky parent company Optionis. “I believe this optimism will persuade many would-be contractors to make the leap in pursuit of enhanced earning power, greater flexibility and improved work/life balance.”
Freelancer and Contractor Services Association CEO Julia Kermode agrees, and predicts that there will be a continued increase in personal service companies being set up as the economic recovery encourages more people to take the risk of setting themselves up in business.
“Many people may be disillusioned in their permanent roles, particularly if they received no pay rises in recent years, but previously put off setting themselves up,” she says. “Now economic recovery may encourage them to take the plunge.”
Contractors will become more diverse
Kermode also forecasts that the current trend of more young people setting themselves up as freelancers is set to continue, particularly in IT, technology, social media, marketing and creative sectors: “TV shows like The Apprentice and Dragons Den have increased awareness of entrepreneurship and are likely influence the current trend.“There is likely to be an increase in female freelancers given the recent discussion on maternity pay for self-employed. Also the shared parental leave is likely to have a positive impact on freelancers as this increases options available to them, and therefore their flexibility.”
Service innovation will take centre stage
The rapid increase in contractor numbers and the increasing legislative challenges they face will require creative and compliant solutions from service providers. With the ongoing increase in contractor numbers, these solutions will also need to be scalable.
I actually think that the defining issue over the coming year will be service innovation and development, as umbrella employment providers and contractor accountants look to enhance their offering
Derek Kelly, Optionis
“Compliance has always been absolutely vital in our marketplace,” says Kelly, “and this will never change. However, these days it is almost taken as read by a growing number of professional contractors that their service providers will be fully up to speed with legislative changes, and their responsibilities with regard to compliance.
“I actually think that the defining issue over the coming year will be service innovation and development, as umbrella employment providers and contractor accountants look to enhance their offering.”
IT contractors to benefit from increased demand and worsening skills shortages
“I think 2015 will be the year the business community accepts that big data is a game-changer, rather than a gimmick,” continues Kelly.
“Contractors with expertise in data mining and statistical analysis will be worth their weight in gold to clients in a wide range of sectors and industries, and can therefore look forward to increasing demand levels and assignment rates. Network and information security experts will also be in demand, particularly within financial services.”
Managing Director of Hays Information Technology Lee Chant notes that there will be more movement in the IT jobs market, as recruitment increases and employees become more confident to move jobs.
“The majority of employers are planning to grow their teams,” explains Chant, “and with skill shortages already a major issue within IT this will create additional pressure on employers to offer competitive salaries and benefits to attract and retain the skilled professionals they need.”
Engineering and construction contracting nearing pre-recession levels
“For professionals at the right point in their careers this year will be a time of great opportunity,” highlights Andrew Bredin, Managing Director, Hays Construction & Property. “Experienced contract professionals remain a crucial resource to take on projects and plug staffing gaps, but as the talent pool drains the market is opening up for graduates, too.”
Bredin notes that construction recruitment market is now operating close to pre-recession levels, with heavy demand for all site-based staff. He sees pressure on the already limited supply of talent, with some roles now subject to generous rate rises as clients compete to attract new and retain existing staff.
“Demand in commercial construction has continued to pick up, quantity and building surveyors are becoming more sought after, and architectural practices are recruiting significantly for the first time since the financial crisis. There was a dramatic pickup in demand for civil and structural engineers in 2014, and the chronic skill shortages in engineering show little sign of fading soon.
“Across all these professions, salaries are moving quickly upwards, and opportunities will be plentiful for these professionals in 2015, posing significant challenges to the employers in need of these skills.”
Kelly agrees, adding: “White-collar skill shortages in engineering and construction will create opportunities for contractors, while North Sea oil and gas will bounce back. Reports of its demise have been greatly exaggerated.”
Finance and accounting contractors benefitting from recovery and regulation
“We expect further movement in the finance jobs market in 2015,” notes Karen Young, Director of Hays Accountancy & Finance. “Where there simply aren’t enough people with the right skills to fill the gaps candidates often have the pick of two or three jobs, they get snapped up quickly.”
Young forecasts that demand in 2015 is likely to be continued to be driven by changes in legislation and regulation: “For example, payroll specialists are needed to manage pensions auto-enrolment now impacting the next wave of smaller businesses, and corporate governance and tax experts are sought after to help navigate new compliance demands.”
Clients need short term access to strategic and change skills. Young continues: “Business transformation and conversion leads are also in demand as companies who have reported in UK GAAP prepare for IFRS conversion from January 2015. Finally as cash is king, finance leaders are putting more emphasis on their credit function and good credit controllers remain in demand in both the SME and blue chip sectors.”
IR35 won’t change, but major tax changes could be ahead, affecting contractors
According to ContractorCalculator CEO Dave Chaplin, the outcome of the Lords’ PSC inquiry suggests that whatever political changes occur during 2015, IR35 is here to stay: “To date, the government has showed no sign of accepting the overwhelming evidence that IR35 does not work and I don’t see that changing after the election. Any new government will have much larger issues to tackle.”
To date, the government has showed no sign of accepting the overwhelming evidence that IR35 does not work and I don't see that changing after the election. Any new government will have much larger issues to tackle
Dave Chaplin, ContractorCalculator
Abbott can see that there may be some detailed technical changes to tax that may have a disproportionate impact on contractors: “The National Audit Office (NAO) reported that it believes Entrepreneur’s Relief (ER) could be costing the Exchequer £2.9bn, which is three times current estimates.
“ER is a powerful tool for contractors to extract cash tax efficiently from a limited company, but I would not be surprised if we see something in 2015 that restricts the amount of relief contractors can gain.”
Abbott’s fears were further increased when ER relief was withdrawn on goodwill when a sole trader or partnership incorporates in the Autumn Statement: “This is on HMRC’s radar and unfortunately when these types of relief are used, they are viewed by government as tax avoidance rather than a legitimate way of using the rules.”
Red tape and compliance
“There are real mixed messages over what is happening to future compliance from March 2015 onwards,” continues Abbott. “Based on what we already know from draft legislation and pre-announced measures, we are aware of areas becoming relaxed and other tightening up.
“Contractors will need to understand the future focus of compliance so they can keep on top of those areas of concern. A good example is the introduction of penalties from March 2015 for non-compliance with RTI. In contrast, P11 requirements and the need for dispensations will be going so there will be a lower reporting requirement.”
Chaplin points out that there are other key events occurring in early 2015, but it is too early to say which way they will go: “We will eagerly await the outcome of the Office of Tax Simplification’s employment status review, as well as the results of the consultation on umbrella employer expenses.
Chaplin concludes: “2015 offers contractors a wide range of opportunities and some very real threats. I believe that whatever the outcome of the election, the performance of the many contracting market sectors and the consultations over tax and status, contractors will remain resilient and resourceful.
“They will turns the threats into opportunities and exploit the opportunities, as they do so successfully on behalf of their clients in the UK’s public sector and businesses.”