Updated on: Dec 18, 2023
Surviving the IR35 landscape can feel like navigating a minefield for contractors, so today I have produced this guide that offers practical solutions and expert advice to help you sail through these murky waters. Discover how recent reforms impact contractors, explore various surviving IR35 options if your client won’t hire outside IR35, and learn valuable tips for ensuring compliance and adapting to the shifting landscape.
Although IR35 has been around for over 20 years, the recent changes reflecting a shift in tax liability impacted the limited company contractor sector. These off payroll working rules were introduced for all public sector workers in April 2017, and the same rules were then introduced for private sector workers from April 2021.
- IR35 Reforms have shifted the responsibility of determining contractor tax status onto hiring companies, resulting in changes to working practices.
- Contractors facing IR35 challenges can explore various options such as becoming an employee, using umbrella companies, or holding out for contracts that are only outside IR35.
- To remain compliant with IR35 legislation and avoid potential issues, contractors should diversify their portfolio, stay informed of legislative changes and actively manage their status.
Understanding IR35 Reforms
IR35 legislation seeks to differentiate between employees and contractors for tax purposes, ensuring that those who should pay employment taxes are correctly classified. Introduced in 2000, IR35 – or the ‘Intermediaries Legislation’ – was designed to address the issue of ‘disguised employees’ working through personal services companies.
Recent reforms have shifted the responsibility for determining IR35 status to medium and large-sized businesses, with significant implications for contractors and hiring companies alike.
Shift in Liability
The onus of determining IR35 status has now been placed on the hiring company, increasing their risk and potentially affecting contractors’ prospects. This shift in liability has prompted hiring companies to take a more cautious and responsible approach when determining the employment tax status of contractors.
As a result, many contractors have experienced changes in their actual working practices and potential engagements with end clients, leading some to stop engaging contractors operating in certain fields.
Impact on Contractors
The IR35 reforms have had have the following effects:
- Decreased engagements for limited company contractors
- Made it more difficult to secure outside IR35 contracts
- Companies have become increasingly risk-averse
- Discontinuation of engagements with limited company contractors by certain private sector organizations
On the plus side we are beginning to see businesses realise that they’re missing out on utilising the skills of a high performing niche of the workforce, and as a result they are stepping up efforts to ensure they can engage limited company contractors compliantly outside of IR35.
Preparation for these changes is key; contractors should explore all available options and make necessary adjustments to navigate these challenges.
Options for Contractors Facing IR35 Challenges
Contractors facing IR35 challenges can consider various options such as:
- Becoming an employee
- Working under an umbrella company
- Seeking new clients
- Exploring alternative business structures
Each path has its own pros and cons, and contractors should weigh these against their unique circumstances before deciding on the best course of action.
Becoming an Employee
One option for contractors is to become an employee. While this may provide job security, access to employee benefits, and potential career advancement, it also involves sacrificing autonomy and potentially experiencing a decrease in net pay.
Furthermore, HMRC has assured that it will not investigate contracts prior to 6 April 2020, even if they fall within the scope of IR35. Thus, transitioning to full-time employment might be a viable option for some contractors.
Working via an Umbrella Company
Another option is to work through an umbrella company, which allows contractors to continue to work on a freelance basis for a broad range of clients. The issue of IR35 does not exist for umbrella workers because all payments are processed using the normal PAYE/NIC payroll calculations.
For contractors who had previously used their own limited company, this is the most common route that is taken when they are offered an inside-IR35 role.
As you will be aware, we offer both accounting services for limited company contractors and an umbrella payroll service, so we have seen first-hand the transition from limited company to umbrella for numerous contractors.
For contractors who have made the switch from limited company to umbrella, the first thing they notice this is the dramatic reduction in the take home pay because their contract rate now needs to “pay” for all the usual employment costs including employers NIC, the apprenticeship levy, and employers pension contributions. A normal full-time employee would never have these deductions off their income.
Finding New Clients and Projects
Another strategy contractors can employ is to seek out new clients and projects that permit operation outside the scope of IR35, thus remaining compliant with the legislation. Networking can be a powerful tool for finding new projects outside of IR35 by connecting contractors with potential clients and opportunities.
For some of our clients for example, we’ve seen their LinkedIn profile with the headline text “Outside IR35 contracts only”.
Establishing relationships and growing their professional network can boost visibility and access to job openings that may not be publicly advertised, providing a level of personal service in their career advancement.
Why a Sole Trader Set-up Often Won’t Work
Opting for a sole trader set-up often won’t work for contractors who use recruitment agencies which typically avoid working with sole traders due to Agency Regulations, which require PAYE and national insurance contributions deductions to be made from the sole trader income. These regulations do not apply to limited companies, making them a more viable option for contractors working on their own account.
As a result, recruitment firms prefer to work with contractors who are either PAYE via the agency, PAYE via an umbrella, or operating through their own limited company.
Ensuring IR35 Compliance and Avoiding Pitfalls
Contractors should actively manage their IR35 status to ensure compliance and avert potential pitfalls. This includes reviewing contracts, demonstrating independence, and documenting working practices. Taking these steps can help contractors maintain their outside IR35 status and minimize the risk of non-compliance.
Contractors should review their contracts for clauses that may put them inside IR35 and seek professional advice if necessary. The CEST tool is a valuable resource to help ascertain IR35 status, and using a contractor calculator can also be helpful. Common clauses that may suggest IR35 application include:
- Control and direction
- Mutuality of obligation
- Specialist services clauses
Regular IR35 assessments can help maintain compliance and steer clear of potential penalties.
We hold the position that IR35 is an employment law issue, and so we always recommend to our clients to use a legal specialist if they want any IR35 advice or related services. We don’t believe that any IR35 advice offered by your accountant presents much value because in the event of an IR35 audit your accountant is not going to represent you at a tribunal hearing (well, they shouldn’t do anyway).
To avoid being considered an employee, contractors should demonstrate independence by having control over their work, securing a right of substitution, and avoiding mutuality of obligation. These factors showcase that a contractor is not providing a personalized service and cannot be viewed as an employee. By demonstrating independence, contractors can maintain their outside IR35 status and avoid potential issues.
There are also the more obvious points of ensuring (a) you are not listed on your clients staff phone list (b) if you need a pass to enter your clients building it should be as a contractor and not as a staff member (c) don’t have your name on the door if you work in an office supplied by your client (d) remember you are not staff, so you shouldn’t be enjoying any staff perks such as summer parties, Christmas parties, or staff training courses.
IR35 Working Practices
Here are some practices contractors can adopt to help ensure they stay outside of IR35:
Control and direction: Document where regular input or control from the client is not required for successful delivery of your services. Written contracts and correspondence, noting your authority to decide when, where, and how work is completed can help establish your independent status.
Substitution clause: If possible, include a substitution clause in your contracts. This emphasizes that you have the right to send a suitably qualified substitute in your place – something an employee cannot do.
Financial Risk: Demonstrate you’re taking financial risk. This might be investment in business assets, liability for correction of defective work, and pictures or copies of your dedicated home office, professional equipment, or specialist software.
Project-based contracts: Whenever possible, negotiate for project-based contracts as opposed to time-based contracts. A limited duration underscores the transient relationship of the engagement.
Multiple Clients: Be prepared to present documents proving you work for multiple clients. This often means invoices and contracts from different clients. This helps to show that you are not reliant on one client, which hints independence.
Marketing materials: Maintain records that advertise your services to the wider market; this could be a website, business cards, etc. This indicates that your business is not exclusively tied to one client.
Professional Indemnity Insurance: Holding professional indemnity insurance indicates that you are a separate entity from your client, and responsible for any professional mistakes.
Company Stationery: Use your own paper for correspondence. Have separate business bank account and pay for business expenses via company, not personal, credit cards.
Detailed work records: Keep detailed records of all work carried out for each client, including work completed independently, business decisions made, and initiatives undertaken.
Term and termination: Ensure your contract has specific terms and conditions about notice periods and the job termination process. This will document the non-permanent nature of the contract.
Remember, IR35 status is determined by your working practices, not just what’s written in your contract, so you need to work as your contract says.
Adapting to the Changing Landscape
To succeed in the changing IR35 landscape, contractors need to adapt by diversifying their client and project portfolio, keeping abreast of legislative changes, and actively managing their IR35 status.
Following these steps will enable contractors to effectively navigate the challenges introduced by IR35 reforms, allowing them to continue compliantly engaging independent workers as independent professionals.
Developing a Diverse Portfolio
Having multiple clients and projects can help contractors in the following ways:
- Demonstrate your independence
- Reduce the risk of being considered an employee
- Diversify your portfolio
- Mitigate the risk of relying solely on one client for your livelihood
- Showcase your ability to adjust to different work environments
- Fulfill the requirements of various clients
Successfully navigating IR35 is an on-going challenge for contractors. However, equipped with the correct knowledge, strategic planning, and proactive IR35 friendly work practices, contractors can effectively manage this complex terrain. By gaining a comprehensive understanding of IR35 regulations, considering multiple alternatives, remaining compliant and adapting to the evolving landscape, contractors can flourish and maintain their professional independence even in the face of IR35 legislation.
Frequently Asked Questions
Is there a way to get around IR35?
Joining an umbrella company is one way to bypass the need for IR35, while still retaining autonomy and freedom. Failing that, if you want to continue to use your limited company, then the issue is not so much one of “getting around IR35” but rather working in a compliant fashion to ensure you are not impacted by the IR35 rules.
What is the best option for inside IR35?
For those caught by IR35, using an umbrella company and PSC (IR35 Switch) is the best option; it allows for future roles to be considered ‘outside’ of IR35.
Does your client have the right to reject a substitute IR35?
Yes, your client must allow the substitution to take place and must pay the substitute from their company if the substitute is suitable qualified.
Is IR35 being scrapped in 2023?
No, IR35 is not being scrapped in 2023. You may remember that shortly after Liz Truss was appointed Prime Minister in 2022, that her chancellor Kwasi Kwarteng announced a controversial mini budget which proposed, amongst other things, that the IR35 reform would be appealed in 2023.
This was great news for all limited company contractors working in the UK, however 45 days after Liz Truss was appointed PM, she resigned. And that was the end of any IR35 reform.
Are there any benefits to becoming an employee under IR35 reforms?
Yes, there are benefits to becoming an employee under IR35 reforms such as job security, access to employee benefits and potential career advancement. However, you may experience a decrease in net pay and have to sacrifice your autonomy.