As IR35 reform in the private sector approaches, contractors are preparing to lose the responsibility for determining if the service they provide to medium and large businesses is delivered as a genuine business or in a manner that implies an employment relationship.
On 6th April 2021, contractors’ end clients become responsible for assessing IR35 status, while there are also new responsibilities for the party that pays them (the fee-payer). If you’re aware of IR35 reform, you’ll know that many contractors are concerned about this unpopular shake up to the rules. They worry that clients don’t understand IR35 well enough to administer it correctly, or will stop engaging limited company contractors altogether.
While this approach seems more likely to be the exception rather than the rule, it’s nonetheless important that all contractors (63.9% of whom are working in assignments assessed as outside IR35 according to the Optionis Contractor Survey) are subject to fair status determinations when the changes are introduced.
So as businesses focus on IR35 reform, what are the possible avenues that clients might take? And what is the situation that you, as a contractor, might find yourself in come April 2021?
Many contractors are very familiar with the IR35 rules having been assessing their status for over 20, and so will be hoping their client carries out fair and accurate assessments. When working outside IR35, you are considered genuinely in business on your own account, working under a contract for services and not a contract of service, which relates to employment. Like any other small business owner, in this scenario you’ll remain responsible for your own tax.
Being wrongfully placed inside IR35 is a major concern for contractors. If you’re assessed as inside IR35 it means your client is of the view that the relationship between yourself and the client is one of employment. As a result, you’ll be taxed as an ‘employee for tax purposes’.
Generally speaking, contractors aren’t keen on working inside IR35 because they will pay more tax (which the fee-payer will deduct and pay to HMRC when reform arrives) but don’t receive any employment rights.
Blanket IR35 assessments
‘Blanketing’ is when a business places all contractors inside IR35 at once, without having considered the individual’s or even each role’s status.
HMRC say that role-based decisions (when multiple contractors with identical terms and conditions are assessed as one) comply with the law. However, when numerous contractors working in different roles are placed inside or outside IR35 at once, the tax office has said this lacks ‘reasonable care’, meaning it’s not compliant.
Contractors therefore need to be wary of and if appropriate challenge blanket decisions, given they could easily result in an incorrect status determination.
The opportunity to work via an umbrella company
In the coming months, the opportunity may arise to work through an umbrella company instead of continuing to work inside IR35 via your limited company. It’s an increasingly popular solution for contractors, recruiters and end clients, given that the worker will benefit from employment rights and protections while the tax responsibilities are taken care of by the umbrella.
A compliant umbrella company will employ you, meaning they will deduct PAYE tax and NI at source. You’ll also have access to employment privileges, such as paid sick leave and other statutory rights. This is something you won’t get when working through your limited company inside IR35.
To recap, an umbrella offers contractors faced with an inside IR35 assessment the best of both worlds – the freedom and independence that contractors want, along with the benefits of employment. Take a look at the benefits of using an umbrella company by our sister company Parasol.
The offer of employment
There’s a possibility that some businesses will stop working with contractors, whether inside or outside IR35 or even through an umbrella company. This means there’s a chance that your client will ask you to become an employee (fixed term or permanent). However, to be clear, the likelihood of this happening seems slim, with feedback from contractors showing that businesses are more likely to explore umbrella arrangements instead. This is something nearly half (42.3%) of individuals are considering.
As you may have gathered, there are a number of scenarios that you may face in the coming months. And while there is still some uncertainty surrounding the changes, it’s clear from our research that an overwhelming majority of businesses realise the value of flexible workers and look set to carry on engaging them going forward.