Increase in contractors' rates predicted

Corporate finance specialists, Capital Strategies, has predicted that IR35 could have five serious impacts on IT contractors. Among these is a 25 per cent rise in contractor rates - a figure the Institute for the Management of Information Systems has since re-estimated to be in the region of 40-100 per cent.

The 41 page company report, 'The People Business' is 'an analysis of business developments in the recruitment and HR market place'. After outlining that there is a 'fair degree of uncertainty relating to the likely impact of IR35' the report lists the following five possible outcomes:

1/. A rise in IT contractor rates. The Institute for the Management of Information Systems originally estimated that rates will rise by around 25 per cent;

2/. A reduction in contractor's take home pay;

3/. A movement of contractors offshore;

4/. Projects being put on hold;

5/. A movement towards contractors being employed directly and on a permanent basis rather than as contractors.

Philip Virgo of the IMIS, who Capital Strategies quoted in the first of the five warnings told UKTECH: "The estimate that the IR35 proposals would lead to contractor rates rising by an average of 25 per cent was made when I was asked to comment on the likely effects last spring. Twenty-five per cent was a forecast. We can now see the reality. For those with skills in current shortage the increases this year have been 40 - 100 per cent.

However rates now are almost stagnant (even falling) for many skills that were in severe shortage in the run up to Y2K and are now in surplus."

Speaking of the wider issue of the problems that IR35 is causing IT contractors, he continued: "[The Government] are driving offshore those with the skills which are most expensive to acquire (in terms of time as well as money). They are also discriminating against small contractors (including sole traders and very small partnerships) in favour of large contractors (particularly those based outside the UK).

Asked how the current situation could be improved, he suggested that "In the short term there is a need to return very rapidly to a situation where the National Insurance position of contractors reflects the benefits to which they are entitled (very little in some cases) and it makes little or no difference whether they pay themselves via salary or dividend. Also [the Government] must greatly reduce the after tax cost of acquiring the skills in current demand (which are changing faster than the Government can measure, let alone respond to) with a publicly organised training programme".

Also speaking on this issue, Matthew Owen, writer of The People Report told UKTECH: "Most businesses start out as one or two person enterprises and such businesses, which may become the big employers of the future, must be given a fair start."

--

Richard Powell