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What are the Pros and Cons of Contracting and Permanent Employment?

Posted by: Nicola Batty
Industry News

Much has been said about the changes to the way that people work over the past two decades. Contracting is now a viable choice for many workers who would once have been permanent employees, but there are signs that the tide may be beginning to turn. The Recruitment & Employment Confederation’s press release confirmed that permanent work placements are once again booming in popularity, suggesting that work as we know it is changing once more.

One of the biggest decisions that professionals have to make is whether they wish to be a more-flexible contractor, or another to follow the recent trend and become a permanent employee. There are advantages and disadvantages to both options, so if you’ve been thinking about a job change, read on to see if it’s possible to determine which option is “best”.

Permanent Employment - For

Security. Job security is tough to find in the modern marketplace, but permanent employment remains the most reliable option for those who want to be sure of a wage every month.

Job protection. One of the greatest benefits of permanent employment is that you have job protection if, for example, the company suffers financial problems or you are made redundant.

Simple taxation. When you are a permanent employee, your tax will be deducted at source, so you don’t have to worry about filing a tax return or setting money aside to pay a tax bill.

Permanent Employment - Against

Lack of flexibility. One of the biggest downsides of permanent employment is the lack of flexibility you are afforded. It is unlikely you will be able to work from home, and you will be restricted in terms of the holiday dates and times you are allowed to book.

Lack of work differentiation. When you are a permanent employee, you will find yourself performing the same role, in the same office, with the same people, day in and day out. If you prefer variety in your working life, this can be difficult to achieve with permanent employment.

Being “trapped”. If you are unhappy with your working environment, it is far more difficult to walk away from permanent, secure employment both psychologically and contractually-- you will likely be required to work a notice period.

Contracting - For

Higher rates of pay. As a general rule, contractors are better paid for the same type of work than permanent employees are. If you’re looking to maximise your earnings, this is something you may want to consider.

Flexibility. As a contractor, you only have to do work you want to do, for people that you wish to work for. If you’re unhappy or uncomfortable, you can walk away and move onto your next job.

Scheduling. As a contractor, you decide when you work and when you don’t, so if you want to take a holiday, you don’t need to ask for permission to do so.

Contracting - Against

Tax. You will be responsible for managing your tax affairs, such as completing tax returns and making direct payments to HMRC.

Future legislative changes. IR35 reforms have proven effective in the public sector, and the government is said to be considering extending these legislative changes to the private sector. These changes place a huge administrative burden and potential risks on companies hiring contractors and contractors themselves, which may make contracting work harder to find.

A lack of security. Contractors have to source their own work and have no protection if a contract is suddenly severed unexpectedly.

So which Type of Employment is best?

The simple answer is: neither. The “best” choice is simply the one that works for the individual; we’re all different, and what you expect from your working life may be very different from what another person sees as essential. Provided you are aware of the pros and cons of each option, you can make an informed decision about what best suits your lifestyle.

The Elephant in the room for Contractors

For more than a decade, Navartis have been focused on providing technical recruitment services within the contract /freelance market.  Although we have recently seen a ‘spike’ in permanent placements, it’s a pretty safe bet that sourcing highly skilled contractors will remain a constant at Navartis.  This freelance focus has flagged a growing requirement for information and risk protection around IR35 reform for both Hiring Managers and Contractors themselves.
Traditionally it has been the contractor’s responsibility to evaluate their IR35 status for each contract and deduct tax accordingly. However, the reforms that are already in place in the public sector require end clients to accept responsibility for the IR35 status and to carry out an IR35 assessment for each contractor they engage.  Possible next steps indicate that the reform will be extended to the private sector, with changes being announced in the 2018 Autumn budget and legislation then going live in April 2019.  A further update from Parliament on the 13th March announced that Government will now publish an IR35 consultation within the coming months.  Philip Hammond's written statement announced: “In the coming months the Government will publish: Off-payroll working – a consultation on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reform.
End clients, agencies and Hiring Managers are increasingly under pressure to ensure that the contractors that are providing services to their business are engaged into suitable positions that fall outside of the IR35 legislation. This responsibility is compounded further as when the HMRC conduct an investigation into IR35, it’s likely that Hiring Managers will be interviewed as part of the review process and could be held liable for any breach of IR35 legislation.   
If implemented, any private business which currently engages individual contractors via intermediary companies will need to assess whether those individuals are likely to be found to be employees of the intermediary company, or of the client itself.
Although there are proposed changes to where the responsibility for IR35 will lie for the private sector, it’s very clear that the current risks for private sector workers impacts those working on a contract basis.  This means that contractors need to protect themselves from the substantial penalties.
The penalty is 30% of unpaid tax if HMRC considers the contractor to have been careless. But the IR35 penalties are really steep if HMRC believes the underpayment to be deliberate: 70% of unpaid tax if the contractor knew they were inside IR35 but deliberately did not make the deemed payment calculation; and 100% of unpaid tax if the contractor knew they were inside IR35, deliberately did not calculate the deemed payment and attempted to conceal the underpayment.
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