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IR35 may Decimate the UK Defence and Aerospace Engineering Industry.

How a draconian incentive to increase tax gathered from UK Engineering Contractors is likely to destroy the UK Defence and Aerospace Industries.

Firstly a disclaimer; I am a Chartered Engineer, a Consulting Contractor, normally working in the UK Defence and Aerospace industry through my own Limited company.

I’ve always made an effort to expand my services offered, so as to appeal to as wide a market as possible, so as to reduce or even remove my dependence on the Defence and Aerospace markets, some of which are, lets face it, somewhat “Going out of fashion”.

In fact, my limited company was formed with the intention it would sometime become self sufficient, trading in consumer UAV technology, designed to enable ordinary folk to explore distant places via VR controlled drones.

Its name, REMMI Ltd. is a multi-lingual anagram of “Remote-me”.

The latest phase of that effort, kicked off three years ago with a PhD research project with the Open University, the “Remote-me” project, sponsored by REMMI Ltd, to defeat the remaining technical hurdle.

The project is still in process, though now facing serious financial difficulty, not only due to IR35, but on another matter which I will detail in a separate story.

My experience of over 20 years working as an innovative Engineer in Defence and Aerospace projects, has had to remain my bread and butter, to put food on the table.

REMMI Ltd, and ultimately myself, still depend entirely upon those earnings from Defence and Aerospace Engineering clients, in exchange for my Engineering Expertise, for income.

IR35

IR35, introduced around 1999, is the UK Government’s response to concerns that Engineering Contractors effectively carrying out work equivalent to work done by full time PAYE employees of client companies, were using limited company accounts to pay less tax than that gathered from their PAYE work colleagues.

There might well have been grounds for concern.

However, this ignored the fact that contractors are not eligible for any of the benefits enjoyed by PAYE employees, such as paid sick leave, paid holidays, company pension, sponsored training, paid professional memberships, subsidised health insurance, business and personal indemnity insurance.

It contained words to the effect that contracting companies with other business activities going on in addition to the contracted activity were exempted from IR-35, and it was up to each contracting company to decide whether or not their business was exempt.

In essence, a contractor found or declared to be within IR35, i.e. working similarly to a PAYE employee, must be paid under PAYE.

This year, 2020, the onus of determining whether or not a contractor falls into IR35 is to be moved from the contractor, to the client.

This means that clients such as BAE, offering roles for contract employment must decide whether or not they think a particular role offered falls into the category of IR35.

So any considerations of whether or not a contractor’s business has other business interests is removed.

How it is affecting us

My own business, being currently between earning contracts, has received two recent offers.

The positions were advertised at contract rates. I went through the hoops of submitting CV, and attending interviews, as did my interviewers. But when the offers were made for each, I was informed they fall under IR35.

When I asked how this would affect rates, I was told the rates will be subject to PAYE tax.

At the rates advertised, PAYE tax is between 30% and 40%.

In other words, to expect 30% if not 40% to be deducted from fees, prior to payment into my limited company.

This means effectively my Limited Company, with all of its overheads associated with its other business development effort, PhD sponsorship, associated web services, software tools, computers, 3D printer materials, insurances, and etc. would have to survive on what is effectively the take-home pay of a permanent employee, after I’ve taken out what I need to live.

Obviously no chance.

I had to decline.

Contracting consulting is something that I always aspired to earlier in my Engineering career.

I know this is true of many earlier career younger Engineers also.

It was a tough move, to jump from a permanent role into the adventurous but relatively unsafe semi-entrepreneurial world of contract consulting.

I’ve had to make it more than once, due to domestic circumstances beyond my control causing previous failure with my first company, Noctiluca Ltd, which was intended, and was instrumental in arc-discharge lighting technology, but that is yet another story, which might or might not be written.

Now, I see IR35 as potentially an industry threatening instrument.

The End of Industry

The most experienced Engineers are those of my generation and older, in our fifties and sixties.

Many folk, both contractors and in permanent employment, are considering retirement.

In my case I do not have any pension beyond a very small trickle from only five years in one of my former permanent roles, but one might consider my pattern of working lately as semi-retired. I have only earned for about 50% of my working time in the past few years. However, I literally cannot afford to completely retire. And besides, I am far from done yet. I love Engineering, and still have many ambitions of things beneficial to the world to achieve.

Most permanent Engineers who actually enjoy Engineering, view contracting as an option of continuing to “Keep their hand in”, even after retirement.

Now, IR35 looks set to kill that possibility of contracting.

So retirement will become all or nothing.

That means no more access to semi-retired experts for industry.

Many contracting Engineers luckier than I to have reasonable final pensions will choose to retire, rather than go back to working in any form of PAYE.

Contracting Engineers unlucky enough to have no other business, and no reasonable final pension, will be forced back into industry as PAYE employees at lower rates than they would have had, if they had always been in those companies.

That means a flood of cheap, reasonably experienced ex-contractors, back into industry. A flood of effectively gig-workers, on zero-hour contracts.

This will follow on, to pressures on existing long time employees, to accept less pay, and less conditions. In other words, the pressure will come on to them too, to accept gig working on zero-hour contracts.

Many of those permanent Engineers, again luckier than I to have reasonable final pensions, will choose to retire now to enjoy their lives, rather than wait to become semi-retired, since that opportunity has disappeared, and they will now have to compete with gig-workers to stay on in their permanent jobs with all permanent benefits also under pressure.

So there will be a brain drain.

In an industry already struggling to retain expertise, this will result in lower quality output, less satisfied customers, an exodus of shareholders, and and an exodus of capital.

We will not be able to compete with our competitors.

Competitors such as the other Defence and Aerospace giants of the world, our US counterparts, who we are now in danger of having to climb into bed with, following our recent cooling of relations with the EU.

Our Defence and Aerospace Industry will become theirs.

I leave it up to readers to work out for themselves how that will affect UK society, and sovereignty.

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This article also appears in Linkedin at https://www.linkedin.com/pulse/ir35-may-decimate-uk-defence-aerospace-engineering-industry-bott

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Frederick Bott

Frederick Bott

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