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Mortgages difficult for self-employed say advisors

A new survey of mortgage advisors has found that the majority of them think that lenders are making it more difficult for self-employed people to get a mortgage, despite growing numbers opting for self-employment.

United Trust Bank carried out this survey and nine of every 10 advisors that responded to it said that the eligibility criteria for people who are self-employed has been made much stricter by mortgage lenders. In total, 91% of the advisors who took part in the survey told the bank that it is now harder than ever for the self-employed to secure a loan.

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This survey was part of a new report published by the bank that has been titled ‘Growing opportunities for brokers in the specialist mortgage market.’ The premise is that lenders outside of the big-name ones might offer a way for those with complicated financial and employment situations to get onto the property ladder.

According to Mortgage Strategy, this report goes on to argue that such people:

“Are a group which will continue to grow and that having lenders sufficiently skilled-up and with an appetite to cater for these customers is vital.”

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This is supported by the available evidence, which shows that self-employed numbers in the UK had reached 4.2 million by March of this year. These figures are provided by the Office for National Statistics.

Many mortgage advisors who have CeMAP training are already aware of the need to look to specialist lenders to meet the mortgage needs of self-employed clients and others with complex circumstances.

Source: Beacon Financial Training

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The hard truth about IR35 reform’s repeal and advice for contractors

The dust hasn’t even yet settled on chancellor Kwasi Kwarteng’s announcement that IR35 reform of 2017 and 2021 is to be repealed, but the scaremongering has already begun.

There’s also the speculators, the cynics, and the so-called ‘experts’ – those with vested interests, and those bitter from being left out of the conversation. And they are on top of the odd article unhelpfully and boldly claiming to contain no less than “everything” IT contractors need to know about the reform’s repeal. If only it was that simple, writes former HM Treasury secondee and ex-tax inspector Kate Cottrell, the co-founder of IR35 specialists Bauer & Cottrell.

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As of October 2022; what are we seeing?

The initial euphoria, expressed by many following the chancellor’s announcement that the Off-Payroll Working (OPW) rules are to be repealed from April 6th 2023 has died down.  There are three main reasons for this:

  1. Is it really going to happen? Nothing has changed yet and we have a Budget coming up in November, preceded by a government already doing a U-turn on its 45p tax rate plan. The possibility of further U-turns therefore seems significant. Fingers crossed that this promised repeal of the OPW rules goes ahead. But it’s not certain.
  2. End-clients (both public and private sectors), agencies, umbrella companies, accountants and IR35/OPW advisers are all taking stock and wondering how this could affect their business. And yes, that goes for me too!
  3. Contractors are realising that unless they have always been outside IR35 and working for ‘small’ companies (not affected by the OPW rules), that their own circumstances are complicated.  Notably where the contractor is:
  • currently with an umbrella, or
  • holding an SDS where the client has stated ‘inside IR35’, or;
  • regularly jumping between their PSC and an umbrella company depending on the IR35/OPW assessment.

Get in touch with us today to speak with a specialist Contractor Mortgage Advisor.

Beware scaremongering

At this stage (Q4 2022), nobody knows how the repeal of the OPW rules will work. That’s the unpopular, hard truth. So — many commentators are reaching for their crystal balls, with some suggesting that there will be new rules for contractors added onto the IR35 rules of old (2000), such as requiring contractors to complete Status Determination Statements. There’s even the odd whisper that end-clients will continue to determine IR35 status; that blanket bans on using PSCs will continue indefinitely, and that HMRC will declare some sort of ‘amnesty’ on prior SDSs with ‘inside’ results. As interesting as they are, these really are only opinions at this stage and should be taken as nothing more.

It is impossible to make concrete plans, yet

Until we see the detail of the IR35 reform repeal in black and white via the Finance Act, it is only possible to try to plan, and consider risks based upon scenarios that may be realistic. That’s where we can have some sympathy for the genuine, qualified, advisers in this space trying to look into the future.

Fortunately, HMRC has promised further guidance for contractors unfamiliar with the IR35 regime. But it is likely (in my view!) that this guidance will be in the form of a referral to the guidance already in place. My expectation is for a straightforward repeal of the OPW rules, with no add-ons, changes, and nothing new that has not already been in place since April 2000.

What can you do in the next six months?

Every part of the contracting chain needs to use this time to analyse the effects on their own businesses and it is vital that all get up to speed with IR35 version one (2000). 

We have seen many “IR35 experts” born since the advent of the OPW rules, and I’d caution contractors to be very careful as a result. These so-called ‘experts’ are, perversely, actually very well-positioned if it pans out that the only thing that changes post-April 6th 2023 is who makes the IR35 decision, and who is liable for getting that decision wrong. For our part, our advisory will continue to work with the same case law precedent, and keep a keen eye on the cases going through the tribunals and courts.

What is the best advice for contractors over the next six months?

  • Keep watching the contractor press for developments (the contractor ‘press’ that doesn’t just stick a press release up!).
  • Decide what you want to do — if you could.
  • Collect and keep all evidence including SDS outcomes, online IR35 status tool outputs, end-client correspondence, contract review results, and working practices changes/opinions.
  • Find out about your personal situation now, to see what the options and (above all else) the risks are, and if a change in your status is feasible.
  • Speak to your client and find out what their position may be come April 6th 2023, especially if you are contracting with an organisation that has banned PSCs.
  • Take advice from only those that, as impartially as possible, understand all the rules (from 2000 onwards), and ideally those with hands-on experience of successfully defending IR35 HMRC investigations.

Final thought

In short, make good use of the next six months so you are ready for April 6th 2023!

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What’s The Future For UK Mortgage Rates?

The Bank of England raised interest rates in September from 1.75% to 2.25%. The 0.5 percentage point increase marks the seventh rise since December 2021 when Bank rate stood at just 0.1%. It also puts Bank rate at its highest level for 14 years.

Concerns are mounting around further, and steeper, interest rate rises in the face of sterling volatility and increasing market uncertainty. Some mortgage lenders, including Halifax, Virgin Money and Skipton Building Society are pulling mortgage deals for new applicants.

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Interest rates, mortgages…
So what do climbing interest rates mean for mortgages? The two million homeowners on variable rate deals, such as base rate trackers, will see an almost immediate rise in their monthly repayments following the recent Bank rate rise to 2.25%. As an example, a tracker rate rising from 3.5% to 4% will cost almost an extra £60 a month on a £200,000 loan.

Remortgagers and first-time buyers will also be faced with higher mortgage costs when they come to source a deal, with the cost of new fixed rates having already factored the latest rise into the price.

… house prices and Stamp Duty
As well as more expensive mortgages, those looking to buy or move home are grappling with relentlessly rising property prices. The average cost of a property coming to the market increased by 0.7% in September (£2,587) to £367,760, according to Rightmove. Annually, average asking prices are 8.7% higher in September than a year ago.

However, Stamp Duty cuts announced in Friday’s Mini Budget – which raised the nil-rate band on the purchase of a property from £125,000 to £250,000 – means that with a third (33%) of all homes listed on Rightmove are now exempt from the tax.

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Fixed rate mortgages
More and more homeowners are now opting for longer-term fixed mortgages in a bid for stability in the face of continued rising interest rates. But while, historically, borrowers would pay more to fix in for longer, the price gap is closing.

According to mortgage broker Trussle, the top interest rate on a no-fee 75% loan-to-value fixed rate mortgage is now 3.25% over two years, 3.35% over five years, or 3.99% over 10 years. Refer to our mortgage tables below for what deals are available today for your deposit level and circumstances.

Why are interest rates rising?
The Bank of England’s Monetary Policy Committee (MPC) uses interest hikes as a means of cooling the economy and taming rising inflation. The Consumer Prices Index (CPI) measure of inflation already stands at a heady 9.9% in the 12 months to August against a government target of 2%.

And with the pound falling dramatically on the international currency markets this week, there are fears that inflation could continue to balloon, prompting the Bank of England to hike rates to as high as 6% from their current 2.25% by next year.

The Bank’s MPC is scheduled to next meet on 3 November to decide on interest rates. However, depending on what happens in the markets and wider economy, there is a possibility that an ’emergency rate rise’ could happen sooner, although the Bank has suggested this is unlikely.

One of the main longer-term drivers behind rising inflation is the cost of energy. The government has intervened by replacing the energy price cap – which had been due to send energy prices soaring to over £3,500 a year from 1 October – with a cheaper Energy Price Guarantee.

This will limit the cost of typical-use household bills to £2,500 a year for two years, with an additional £400 automatic discount applied to electricity bills for every household between October 2022 and March 2023.

By Laura Howard

Source: Forbes

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Mini-Budget: IR35 will be repealed from April

The IR35 reform will be repealed from April 6, 2023, according to this morning’s mini-Budget.

Speaking to the House of Commons today (September 23), Chancellor Kwasi Kwarteng said from April, workers across the UK providing their services via an intermediary, such as a personal service company, will once again be responsible for determining their employment status and paying the appropriate amount of tax and NICs.

Kwarteng also used today’s mini-Budget to scrap the additional rate of income tax and cut its basic rate to 19 per cent in a series of tax cuts which amount to £45bn.

The 2017 and 2021 reforms to the off payroll working rules – also known as IR35 – were a tax law that required the end client, and not the contractors they hire, to decide if the working relationship resembles a self-employed engagement or employment.

Under existing rules, the fee-paying party (either the end client or recruitment agency) shoulderd the liability.

The aim of the reform was to stop the promotion and misselling of disguised remuneration schemes, however the legislation has received criticism.

Kwarteng has repealed these reforms as part of the first steps in taking complexity out of the tax system.

He said: “To achieve a simpler system, I will start by removing unnecessary costs for business. We can also simplify the IR35 rules and we will. In practice, reforms to off-payroll working have added unnecessary complexity and cost for many businesses.

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“So as promised, by the prime minister, we will repeal the 2017 and 2021 reforms. Of course, we will continue to keep compliance closely under review.”

The changes will mean workers will once again be responsible for determining their employment status and paying the appropriate amount of tax and national insurance contributions.

This will free up time and money for businesses that engage contractors which the chancellor said could be put towards other priorities.

The reform also minimises the risk that genuinely self-employed workers are impacted by the underlying off-payroll rules.

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IR35 reforms
In August, prime minister Liz Truss gave an interview where she indicated she would review the IR35 reforms.

The reforms were introduced in April 2021 to the private sector, and means that the responsibility for assessing whether a contractor is self-employed or employed is now with the end client, and not the contractor themselves.

The liability, and therefore financial risk, was also transferred to the fee-paying party.

The changes have been branded “a mess”, “unpopular” and “puzzling”.

The controversy surrounding the changes prompted the former chancellor, Sajid Javid, to pledge a review of IR35 as part of the Conservative party’s manifesto in the lead up to the general election.

By Sonia Rach

Source: FT Adviser

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Truss to announce stamp duty cut – report

UK housebuilders rallied on Wednesday following a report that Friday’s mini-budget could include a plan to cut stamp duty.

According to The Times, prime minister Liz Truss will announce the move in the mini-budget in an attempt to drive economic growth. It was understood the PM and chancellor Kwasi Kwarteng have been working on the plans for more than a month.

Truss believes that cutting stamp duty will encourage economic growth by allowing more people to move and enabling first-time buyers to get on the property ladder, The Times said.

It cited two Whitehall sources as saying that cuts to stamp duty were the “rabbit” in the mini-budget, which the government is billing as a “growth plan”.

Under the current system, no stamp duty is paid on the first £125,000 of any property purchase. Between £125,001 and £250,000 stamp duty is levied at 2%, £250,001 and £925,000 at 5%, £925,001 and £1.5m at 10% and anything above £1.5m at 12%. For first-time buyers the threshold at which stamp duty is paid is £300,000.

During the pandemic, then chancellor Rishi Sunak lifted the stamp duty threshold to £500,000.

At 0910 BST, Persimmon shares were up 5.4%, while Taylor Wimpey and Barratt were up 4% and Berkeley was 3.5% firmer. On the FTSE 250, Redrow was 5.6% higher, while Bellway and Crest Nicholson were up 3.6% and 3.4%, respectively.

Tom Bill, head of UK residential research at Knight Frank, said: “Nobody can accuse the new government of lacking an economic vision. If its low-tax approach extends to stamp duty, recent history tells us it will trigger higher levels of demand in the housing market at a time when mortgages are getting more expensive, which will support social mobility.

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“Prices could move higher in the short term if supply initially struggles to keep up but more balanced conditions will return provided the cut is immediate and permanent.”

Neil Wilson, chief market analyst at Markets.com, referred to the potential stamp duty cut as “the old Tory trick of juicing the housing market in its heartlands to boost confidence (wealth effect) whilst doing not a lot for housing supply”.

“I’m not for concreting over the green belt at all, but there will be questions about the economic soundness of this policy, as there always is. However, with interest rates rising so quickly, an offset to the cost of buying a home would grease the wheels of the market -without higher rates could cause the housing market to seize up.”

He added: “Clearly a stamp duty cut is good news for housebuilders who can expect higher selling prices as a result.”

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, argued that a stamp duty cut could do more harm than good.

“Buyers are unlikely to be unhappy at the prospect of a tax cut, but if the government chooses to cut Stamp Duty in an effort to stimulate the housing market, there’s a risk it could do more harm than good.

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“It’s easy to see why the government is concerned about the housing market. We’ve seen demand fall consistently since May, when rocketing bills, rising house prices and ever-increasing interest rates started to take a toll on buyer enthusiasm. There’s a risk that if rate rises accelerate, pressure on buyers could reach a tipping point, where demand dries up.

“We know from very recent experience that a Stamp Duty holiday can stimulate demand. However, the only reason these holidays work is because people feel they have a small window of opportunity to take advantage, otherwise they’ll miss out. The point at which they think they can just wait for the next one, they will start to become less effective.

“Even if it does stimulate demand, it overlooks the fact that the real brake on the property market is a severe shortage of supply. With an average of 36 properties on each agent’s books, we’re still close to an all-time low in the availability of property for sale. Driving demand without addressing supply would risk more buyers chasing a tiny number of properties, which would push prices up.

“By ramping up prices at a time of rising mortgage rates, the end result would be higher monthly mortgage costs, which would be increasingly unaffordable. And the Stamp Duty holiday wouldn’t help on this front. This in itself could be enough to put buyers off, and if it deters enough of them, it could end up having the opposite impact to the one that’s intended.”

By Michele Maatouk

Source: Sharecast

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Bank of England to suspend market operations for State funeral

The BoE said CHAPS will be closed on 19th September, in line with its normal bank holiday arrangements.

CHAPS handled around 174,000 payments each day, in the year to February 2021, with an average payment value of £2.1m. That works out at around £367bn each working day.

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CHAPS is used by banks and large corporations to settle high-value money market and foreign exchange transactions, by companies to pay taxes, and by solicitors and conveyancers to settle property transactions.

The Bank’s Real Time Gross Settlement (RTGS) service, which underpins large transfers between bank accounts, will also be closed.

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Back in 2014, RTGS collapsed for most of a day, putting thousands of housing market transactions on hold.

Last week the BoE said the sale of corporate bonds held by the Asset Purchase Facility will be delayed by a week, to 26 September, following its decision to delay its next interest rate decision by a week (to 22nd September).

Source: London Loves Business

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Fall in UK house prices ‘should be taken with a pinch of salt’

A fall in house prices in July 2022 should be taken with a pinch of salt, a contractor mortgage brokerage today warns.

Freelancer Financials, which specialises in mortgages for contractors, sounded the cautionary note this morning, following the Halifax recording the first property price dip in 13 months.

The limited company-friendly lender found that average house prices fell between June and July by 0.1%, while the annual rate of price growth over the same period eased from 12.5% to 11.8%.

The first of its kind since June 2021, the 0.1% fall takes the average property price tag to £293,221, down £365 on the previous month’s record-high, Halifax said.

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‘Stimulated’
But it is probably unfair to compare today’s house prices with 2021’s — when the stamp duty holiday “stimulated the market,” according to Freelancer Financials’ John Yerou.

“Plus, there is usually a seasonal drop-off in the summer months of July and August,” continued Mr Yerou, the brokerage’s chief executive.

“This fall in prices is only fractional …[and] comparing 2022 with pre-pandemic levels, in 2019, demand is still up.”

Similarly, despite the fall of just 0.1% on a monthly basis, house prices remain more than £30,000 higher than this time last year, observed Halifax’s managing director Russell Galley.

‘Bigger houses, biggest price gains’
The lender signalled that contractors looking to move up the property ladder will probably benefit the least from the tiny price fall, because the gains in the values of larger homes are still strong.

Price gains for “bigger houses” even outpaced those for smaller homes in July, with the price of a detached property inflating by £60, 860 (+15.1%), versus £11,962 (+7.7%) for flats.

“Although this fall in house prices seems to indicate that the housing market is cooling off… [it[ should be taken with a pinch of salt,” cautioned Freelancer Financials’ Mr Yerou.

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‘Drivers of buoyancy remain’
“We shouldn’t read too much into any single month”, agreed Mr Galley of Halifax.

“Leading indicators of the housing market have recently shown a softening of activity, while rising borrowing costs are adding to the squeeze on household budgets against a backdrop of exceptionally high house price-to-income ratios.”

Galley added that some of the “drivers of the buoyant market” of late, such as extra funds saved during the coronavirus pandemic and changes to how people use their homes, remain.

However Halifax says the “extremely short supply” of homes for sale is serving to “underpin” property prices at a high level.

‘Negotiating power gradually shifting’
At Freelancer Financials, Mr Yerou shared his outlook with ContractorUK: “Several indicators point to activity in the market continuing to cool from the lofty heights of the last two years.

“It is likely that the impact of interest rate rises will gradually trickle through, but right now they’re not having a serious impact on the property market. Yes, demand has lightened a fraction and negotiating power is gradually shifting to buyers, but until the imbalance in affordable properties is addressed, house prices will remain stable.”

By Simon Moore

Source: Contractor UK

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Why contractors don’t normally need the Bank Of Mum & Dad to buy a home

Amid research showing that the ‘Bank Of Mum and Dad’ is doing a brisk business, it’s worth pointing out that in our experience, the number of first-time-buyer contractors utilising a limited company but requiring help from BOMAD is minimal, writes John Yerou, CEO of Freelancer Financials.

Contractors and the Bank Of Mum & Dad

Or at least, it’s minimal among contractors compared to their permie counterparts. Nearly all limited company contractors manage to save a minimum of 5-10% deposit without family help. The majority of PSC contractors who do get help from BOMAD are those who are trying to put down larger deposits — to get more favourable interest rates.

But how did we get here? How did we get to the Bank of Mum and Dad, potentially even propped up by the Bank of Auntie (‘BoA’), lending to those in need of a home loan? And why does it matter if you’re reading this as a limited company director who might need to open an account with BOMAD or even BoA?

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As safe as houses?

Well, following the 2007/2008 financial crises, the UK became home to tens of thousands of mortgage prisoners. These were homeowners who’d bought at the crest of the property market boom only to see it bust and shower them with shortcomings.

They thought, like many, that property investment was as safe as houses. But one global slump later, they found themselves in negative equity with outstanding mortgages greater than the value of their homes. To a lesser extent, there’s a real possibility of that happening again, post-covid. But that’s an aside to perhaps consider further down the line.

Mortgage prisoners removed many homes from the marketplace — their owners becoming stuck until house prices rose again. But even then, the sharp rise in the price of housing stock in the run-up to the crises made owning a home all but impossible for the younger generation or other first-time buyers.

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Extraneous factors fuelling the fire

Running alongside this phenomenon was rising EU immigration and successive governments failing to meet affordable housing targets. Tag on post-bust ‘Responsible Lending,’ which introduced stricter lending criteria, and the restrictions imposed on young borrowers formed a formidable, often unsurmountable barrier.

That interest rates plummeted to historical lows and Stamp Duty holidays became de rigeur didn’t matter. If you couldn’t afford the deposit — and at one point, you couldn’t get a mortgage with less than 15% — the first rung on the property ladder was out of reach.

Even if by some chance, young individuals and couples managed to find a home, afford and save a deposit, it was only the first stepping stone across a raging river. But such is the Brit way of life, from this adversity a solution came to prominence — the Bank of Mom and Dad (BOMAD).

Are you a limited company director needing a loan from BOMAD?

Since the pandemic, lending criteria have become protracted, for everyone, not just the self-employed.

One area that lenders’ mortgage advisers seem more interested in than ever is where a potential borrower found their deposit. These advisers on behalf of the lenders ask us, so we in turn have to ask our clients!

Now, we don’t just deal with contractors. We secure mortgages for all — sole traders, freelancers and even employed people referred to us by their contractor friends. And this is where we see a sharp difference in BOMAD borrowers.

Yes, we deal with contractors earning £50,000 a year. But they’re somewhat the exception. Many of our contractor clients earn upwards of £300/day. To get a mortgage with Halifax (unless they’re an IT contractor), they have to earn at least in excess of £75,000 a year.

This puts contractors in, typically, a higher income bracket than many other young people, even than permies who do the same job. This means they can save a lot harder, especially if they’re working through their own limited company (or Personal Services Company). Thus, contractors’ reliance on BOMAD is greatly reduced compared to the national average first-time buyer.

Get in touch with us today to speak with a specialist Contractor Mortgage Advisor.

Almost half of other first-time buyers use the Bank Of Mum & Dad

That contractors are more likely to go it alone bears out in our figures, too. Only around 5-10% of higher-end contractors lean on relatives for help with a deposit. In contrast, getting on for 20% of permies or sole traders/freelancers get help from their families to buy a home.

Across the industry, it’s expected that almost half a million borrowers will have borrowed from BOMAD in the three years up to 2024 — almost half of all first-time buyer activity. So a total of (roughly) £25billion families will have forked out to help their offspring move out.

Why BOMAD matters (answer: the lenders are interested in the source of your deposit)

One reason lenders ask where the deposit has come from is to help determine the applicant’s mortgage affordability.

If the money is a gift from parents, either from their savings or they’ve released equity to donate to their offspring’s cause, all well and good. But if that money has to be repaid, it’s as well to understand that the buyer can afford to repay both the mortgage and the BOMAD loan from the outset.

Banks need to know this in order to make an informed decision. But it’s a good exercise for the benevolent parents as well. The last thing anyone wants is rifts in the family due to money issues, especially where siblings may feel the impact of one of them welching on repaying back into the inheritance pot.

BOMAD stigma in the banking industry

With so much transactional cash involved, we understand why the financial authorities want to keep tabs on such activity. And that’s part of the reason, I guess, why people only mutter that they’ve borrowed from relatives rather than proclaim it.

It’s this stigmatism that large sections of the industry want to see eradicated. And, due to the current economic forecast, it may well become the norm that first-time buyers are expected to get help from relatives. And the more open we can be about the often-taboo subject of money the better off we’ll all be.

By John Yerou

Source: Contractor UK

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Union urges contractors to follow Kier lead on sick pay

Campaigning by Unite has secured sick pay of up to £100-a-day for Kier workers.

Union bosses are now calling on other contractors to follow suit and boost their terms beyond the statutory rate which can be as little as £16 per day.

Unite regional officer for the construction sector Malcolm Bonnett said: “Unite has been campaigning hard to end the discrimination on sick pay for construction workers so we’re delighted by this victory.

“Statutory sick pay in the UK is the lowest in Europe so it was vital we persuaded the employer, a wealthy business, that they had a duty to pay when workers are ill.

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“From here, we build further. Unite is determined that other construction employers act to end sick pay discrimination, too.”

A Kier spokesperson said: “At Kier, we recognise that our people are our greatest asset and our teams have been working hard to provide industry-leading policies and measures to support our people.

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“In the last 12 months, we have launched improved family-friendly policies, our new and enhanced standard for sick pay for all and we have become signatories of the Real Living Wage.

“All of these actions reflect the plans we put in place as a result of our strategic review. They form part of our Performance Excellence culture and underline our focus and commitment on doing the right thing.”

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By Grant Prior

Source: Construction Enquirer

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What HS2’s £9.5millon IR35 tax provision means for contractors

Yet another public sector body looks to have fallen foul of IR35.

This time, it’s High Speed 2 (HS2) – a government-funded arm of the Department for Transport – that is readying itself for a £9.5million tax bill.

If confirmed, this latest IR35 calamity in the public sector would take the cost of non-compliance in government departments well past £270m, writes Seb Maley, CEO of Qdos.

As revealed in HS2’s annual accounts, the £9.5m has been set aside in the event that HMRC confirms that mistakes have been made following the introduction of IR35 reform in the public sector in 2017.

A public sector IR35 problem of a different kind
But HS2’s IR35 problems look to be slightly different from those experienced by the likes of the Ministry of Justice, Defra and the Home Office, to name but a few. Instead of incorrectly assessing the IR35 status of contractors engaged – which has been an issue for the aforementioned departments – confusion looks to have arisen with regard to a consultancy providing contractors to HS2.

“During 2020, internal checks and additional HMRC’s guidance highlighted some cases of workers who were engaged through other suppliers that had not been appropriately reviewed”, the accounts state.

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Them, not us
Put differently, HS2 didn’t carry out IR35 assessments or issue Status Determination Statements (SDS) to contractors engaged via a third-party, given it took the view that this third-party was responsible for determining status.

If the third-party supplied a genuinely outsourced provision of labour, this would be true and HS2 wouldn’t be required to carry out IR35 determinations. But if the third-party is merely providing contractors, the buck stops with the end-client – in this case, HS2.

This is why HS2 has allotted £9.5m, ready to settle up with HMRC, should the tax office find that not only has the high-speed railway organisation misunderstood its responsibilities under IR35, but potentially also engaged contractors under the wrong IR35 status.

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Wider implications of HS2’s potential IR35 slip-up
Eye-watering tax bills aside, the worry is that it could see another public sector body take a needlessly risk-averse approach to IR35. That’s been a ‘strategy’ adopted by far too many organisations due to a lack of understanding with regards to how the revised off-payroll rules can be implemented compliantly because contractors can, in fact, be engaged outside IR35.

It’s my view that banning contractors would jeopardise the entire HS2 project. Giving contractors ultimatums – ‘work inside IR35 or via umbrella companies’ – will result in significant skills gaps, as contractors opt to work elsewhere with businesses offering genuine contractors the opportunity to operate outside IR35. In a space which relies heavily on specialist skills and the need to engage these skills in a cost-effective manner, transferring all contractors onto the payroll increases costs dramatically.

HS2 is risk-averse on IR35 anyway
With that being said, it’s not as if HS2 has a habit of engaging contractors outside IR35. Its accounts show that just 20 of the 294 contractors engaged between April 2021 and March 2022 operated outside IR35. That’s a figure which is at odds with the 86% of more than 32,000 contractors that our IR35 contract review business has assessed on behalf of businesses which, after a rigorous assessment, in our view belong outside IR35.

Focusing on how the contractors were supplied to HS2, which as I mentioned was via a third-party consultancy, above all else, it highlights just how important it is that both the end-client and the consultancy understand which party is responsible for determining IR35 status, along with their wider obligations under the reform.

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The ‘contracted out’ conundrum? It spells o-p-p-o-r-t-u-n-i-t-y to HMRC
So will we see more of this – not just in the public sector – but in the private sector too?

Don’t rule it out. Engaging contractors via a third-party means there is a slightly different consideration for end-clients which, as I previously outlined, is whether or not the provision of labour is genuinely outsourced or not. HMRC will be well aware of this — of course, and could well scrutinise these arrangements on a wider scale.

Added to this is the economic landscape and the pressure that HMRC is under to raise tax revenue for the Treasury. Going forward, I expect the tax office to ramp up IR35 compliance activity among businesses generally speaking, but also focus on these specific areas where confusion can easily arise, which presents an opportunity for HMRC.

By Seb Maley

Source: Contractor UK