The Story of NREs

History

IR35 has been around for about 20 years. Before it, companies would occasionally attempt to convert employees to contractors in order to gain a cost and tax advantage. At the time, the tax generated by a contractor was less than that generated by an employee, and so HMRC would attempt to fine or prosecute anyone attempting to do this.

The difficulties of these actions lead to the creation of IR35. The intention was to make it easier to determine if a contractor should really be an employee or not (and if so, for different rules on taxation to apply).

A consequence of the introduction of IR35 was to create a protected class - that of the "contractor". With IR35 in place, whilst anyone could become a contractor, no one could create contractors by converting employees. As such the concentration of contractors remained relatively low. As demand for contractors fluctuated, the pool didn't really change and so rates were generally favourable to contractors, rather than businesses.

As years passed, tax code changes mean that the levels of tax generated by contractors and employees has roughly levelled out (actually, contractors generate slightly more by percentage than employees). IR35 remains, and HMRC have continued to find it difficult to reliably detect and prosecute cases of contractor misuse. That said, they still maintain that "non-compliance is widespread".

Present Day: The NRE

Finance Bill 2017's changes to IR35 were ostensibly about tax. Indeed, the bill introduced very little of any real controversy unless examined extremely carefully. Opposition parties evidently did not do this, and neither did the unions.

The 2017 bill primarily moved the responsibility of determining if a contractor was in fact an employee to the hirer. Far more importantly though was that it created a fourth class of worker in the UK: "employed for tax purposes", also known as the NRE.

In the public sector, NREs were immediately used in place of contractors by various bodies. NHS Digital attempted to carry on regardless and were promptly fined £4.3M by HMRC. These fines are actually double taxation, because the contractors have already paid the tax due, but despite this, the practice continues. The deterrent factor of the fine was so effective that numerous other bodies followed suit and moved to hiring NREs exclusively.

The private sector has been slower to adopt NREs, presumably because there was little imperative. However, as deadlines got nearer, the banks were first to move to NRE-exclusive policies. Other organisations have followed suit, meaning NREs are now working in pretty much all industries.

An interesting side-effect of moving to NREs has been that hirers are generally pushing rates downwards. This makes those rates comparable to ordinary employees. Since NREs do not have the cost overheads of contractors, some depression of rates seems reasonable.

All throughout this time, neither the opposition parties, nor the unions have raised any concerns. They were both petitioned by contractor campaigners but even still did not object to the use of NREs. It seems unlikely that they will now raise concerns, and even if they do, their slow response and ever-growing numbers of NREs discredits them.

Future

The contracting market is set to decline. Unlike the public sector, the private sector has duties to shareholders. Since NREs do not count towards "headcount", and since "earnings per employee" is a significant factor used by investors, we can expect NRE-adopting companies to see share price rises and possibly major investment and buy-outs with foreign wealth. Such events are likely to make decision makers personally rich, and so we can expect them to be significantly motivated to use NREs.

Contracting may remain a niche sector, but most organisations will simply use NREs in place of contractors because NREs typically do not command the premium rates that contractors historically have enjoyed. Moreover, since NREs do not attract the attention of HMRC, the Unions or indeed any significantly vocal groups, hirers can use NREs without public relations risks.

The flexibility, reduced costs and no-hassle features of NREs make them ideal for almost any business to use extensively.

No Rights Employees - the future of workers in you business.