The Treasury's constant offensive against contractors could prove serious for organisations needing to bring in ERP specialists to roll out projects.

The ERP market in the UK has always depended on the high calibre people who work within it and, in particular, on self-employed contractors operating at every level from junior programmer to heavyweight project manager.

In recent years, however, these key individuals have come under increasing threat as the Treasury has sought to push more and more of them into permanent employment. This stems from the fact that, while employers see a rapidly deployable and reliable resource when they look at a contractor, the Treasury, only see a potential loss of income. In their eyes, all types of workers are best placed within the PAYE system, which makes the collection of personal taxation and national insurance a relatively simple and straightforward matter.

The first big assault on contractors came in 2000 with the introduction of IR35. This new measure was designed to tackle the substantial number of workers, particularly those in the IT sector, who were claiming self-employed status by setting up their own limited companies. “In effect it stated that working through a limited company did not automatically mean a contractor was self-employed,” says Mark Fordham of accountants, TaxAssist.

“What counted was the exact nature of the relationship between the contractor and their client. If there was any suggestion that the latter was controlling that relationship, perhaps through hours and place of work, then it could easily be re-classified as one between employer and employee.”

Although IR35 stirred up a hornet’s nest at the time, most ERP professionals subsequently found ways to comply with it, but not without a price. “I decided that the most sensible way forward was to engage a firm of lawyers, which focuses on this area, to review all my contracts and working arrangements to make sure I don’t fall foul of IR35,” said Oracle consultant, James Ball.

“They’re very good but the whole thing can be very expensive. And, no matter how good the professional advice and support you are getting, you always feel as if you are looking over your shoulder worrying if something is going to go wrong and land you with a huge tax bill and fine. It’s something you could really do without when you are trying to run your own business.”

Of course IR35 didn’t just affect individual contractors, but also the organisations which hired them, because mistaking the employment status of an ERP specialist could land an unsuspecting employer with liability for national insurance payments. However, working out if someone is genuinely self employed is not necessarily straightforward.

“Employment and tax cases have set out some basic guidelines to help employers avoid falling foul of IR35,” said Sikin Andela of employment solicitors, Glovers, “but in every case individual circumstances have to be taken into account.

“The factors that need to be taken into account include the degree of control you have over the person doing the work, whether they provide their own equipment and the nature of that equipment, whether they hire staff to help them in the work, the degree of financial risk they take and the degree of responsibility they have for investment and management.

“You also need to look at whether they have set up a business-like organisation of their own, how many engagements they perform and whether they are performed for one person or a number of different people.”

The second assault came in the shape of new legislation on Managed Service Companies in 2007. In the wake of IR35 new composite corporate entities came into being to provide contractors with a shelter against the attentions of the Inland Revenue. These ‘umbrella companies’ treated their clients as employees and conformed to the PAYE system, whilst ‘managed service companies’ often took a more adventurous approach to tax legislation and paid out dividends.

The 2007 legislation was designed specifically to target the latter. As a result many contractors again found themselves having to reassess the way they worked.

Given these signs of a sustained campaign against contractors, it’s perhaps not surprising that many of them have decided the potential benefits of self employment are simply not worth the effort.

Erhan Tumsa, for example, gave up self employed status to take on a permanent role with an Oracle HRMS implementation specialist. “As a contractor you just have so many things to deal with – taxation, administration, business development – not to mention actually doing the job you have actually been commissioned to do.

"When you take all this into account and the fact that you have to pay for all your ongoing training yourself, you’re very likely no better off contracting than you are when you are on someone else’s payroll. And, as a permanent employee, you do have the stability of a guaranteed monthly pay cheque.”

If the campaign against contractors continues and more and more follow Mr Tumsa’s example, there may be some very interesting times ahead for the ERP sector.

Satnam Brar is managing director of ERP recruitment specialists Maximus IT