HSBC will cease engaging limited company contractors from this September, saving itself the job of having to assess them under a new IR35 from April 2020, ContractorUK has learnt.

The bank has told all PSC contractors at key units like HSBC Digital that after one further contract extension, they must choose between being terminated or becoming employees

But HSBC has sweetened its ultimatum for some contractors on a so-called ‘keep’ list it has drawn up, by saying they can stay on as long as they work via a third-party from September.

The thinking at HSBC is that it will remove itself from April 2020’s obligation to decide contractors’ IR35 status, by making them staff or a third-party’s PSC. Or just by axing them.

'A sledgehammer to crack a nut'

“Culling a flexible workforce and replacing them with employees will remove any IR35 concerns for HSBC,” status advisory Qdos Contractor confirmed last night.

“But it’s a worryingly short-sighted approach to dealing with IR35 reform [akin to] using a sledgehammer to crack a nut.

The advisory’s Seb Maley then cautioned HSBC -- voted ‘best client’ by ContractorUK readers in 2017: “Moving contractors to a third-party supplier is also a risky move.

“We recently reviewed dozens of such arrangements for a large public body and a significant proportion of them were ostensibly providing labour – in the same way an agency would – but dressed up as a managed or outsourced service. This provides a false sense of security as, legally, the original client – HSBC if this goes ahead -- must still make the determinations.”

Whether the bank goes ahead with its September ultimatum is indeed still a question, according to another expert on IR35, Bauer & Cottrell. Its co-founder Kate Cottrell said:

“[HSBC] could see all their talent disappear and just like what happened in the public sector [before IR35 reform was introduced there], the bank may then have to change its approach.”

'Projects at risk'

Yesterday, a source inside HSBC suggested a contractor exodus is already looming, implying that experienced contractors will not want to go permanent or be engaged by a third-party .

“Come September”, he said, “a load of key people with excellent knowledge of how to get technical stuff done at HSBC will go, putting the bank’s programmes and projects at risk.

“Then, if another bank applies the IR35 reforms correctly-- rather than HSBC’s throw-out-the-baby-with-the-bathwater approach, they will be able to hire the cream of available talent.”

'Premature'

Bowers Partnership, a recruiter of niche financial contractors confirmed: “As we’re still several months away from the draft legislation…for HSBC to make such a bold move – assuming it transpires, seems somewhat premature.

“Even if it doesn’t, surely most of the contractor workforce at HSBC will be now limbering up for a serious summer of job-hunting? There are four productive months between now and September, and the good contractors should be able to bag a new role elsewhere”.

Yet a senior IT recruiter, Les Berridge, wonders what may happen to the industry in those four months, especially if HSBC’s ‘cease and desist’ PSC model due to IR35 reform is copied.

'Ripple-effect'

“Major financial institutions set the trends for all contract work in the UK,” began Berridge, the REC’s IT sector executive-committee vice-chair, who was speaking yesterday in a personal capacity.

“If they [all] ceased to hire contractors, it would create a ripple effect across the whole contracting community, in every sector, which would be bad for contractors, bad for the £35 billion recruitment industry but most of all, bad for British businesses.”

In an appeal to end-users tempted by HSBC’s plan to stop using PSCs by saying – ‘go permanent, go third-party or leave,’ the Networkers recruiter urged -- “hold your nerve.”

Berridge also advised: “If a role is on a project basis, using a properly insured PSC, working independently, it is most likely to be outside IR35.”

'Drastically conservative'

Yet it is the advice which HSBC presumably received that led to it drawing up the September ultimatum which interests Colin Morley, director of recruitment solutions at Harvey Nash.

“I’d be interested to know who advised HSBC to take such an approach. Are they being drastically conservative or is there a bigger play whereby they’re getting a lot of contractors to leave in September, before reengaging with them after April 2020?” he asked.

Either way, Morley is “surprised” at HSBC’s stance, partly as the amount of planning required -- given HSBC is a massive user of contractors -- will be “eye-watering.”

“With projects and programmes in flight already, will they have enough time to swap the resources out and still ensure a smooth knowledge transfer?” he asked. “It is a brave call, particularly in FS, to be the first to do this. Sometimes though, history favours the brave.”

'Deemed employment risks'

IT staffing firm First Point Group sounds less curious. It says engagers are already turning their backs on directly engaging PSCs, and not just since IR35 reform came on the radar.

“If HSBC are indeed moving away from directly engaging with limited company contractors, then that is pretty standard in many major companies’ contingent workforce practices.

“Many only engage contractors via a third party — a recruiter, a payroll firm, or a strategic partner”, the firm said, “[as] this may mitigate their deemed employment risks [under the Agencies Workers Regulations].”

However such inserting of a third party “will not alone circumvent the IR35 changes next April,” cautions the firm's London office managing director David Taylor.

“Agency contingent workforces will also need to amend engagement types with their PSC contractors for all parties to comply,” he said last night. “More guidance on the final implementation of the IR35 changes from HMRC is due in the coming weeks.”

'Properly understand risk'

But by that stage, one HSBC contractor yesterday hinted he’ll already be actively searching for a new contract, even though, by comparison to some of his co-workers, he’s a newcomer.

At the other end of the experience scale is a veteran IT contractor whose former colleagues are at HSBC and affected by the bank’s September ultimatum.

“Good to know -- isn’t, that our big financial companies property understand risk,” the contractor scoffed.

“Basically, [with its ultimatum] HSBC are [in effect saying they are] happy to pay extra for permanent staff -- given the overheads they incur…-- or pay extra to third parties, rather than incur no additional costs at all and use contractors properly, outside IR35 parameters.”

'Not holding my breath'

Meanwhile, quite apart from what it says about the bank, the insider at HSBC fears that the implications for what the ultimatum says about the future of contracting -- as a whole, could be stark.

“How companies decide to approach this [off-payroll working rules from April 2020] in the long term will decide if limited company freelancing remains a viable option”, he warned.

“If some smart companies do their due diligence and get contracts and working conditions IR35-compliant, then freelance contracting may survive. But I’m not holding my breath.”

An HSBC spokesman said: “Most major UK firms are looking at their post IR35 management of contingent workers and like many companies we have not made any decisions on our future policy towards this important sector of the workforce. We are unlikely to form a firm view until the summer when the final guidance is set to be published by HMRC.”