Contractors' Questions: Is being inside IR35 cause to go brolly?

Contractor’s Question: Your debunking IR35 myths article says, at point 10, that “being inside IR35” is not a reason to consider using an umbrella company.

In the public sector since April though, is it not the case that being inside IR35 is indeed cause enough to use an umbrella? My agency reckons that IR35 applying means contractors should only use a brolly as they can no longer be paid as a PSC. And does the IR35 legislation apply to the person and or/company, or the role/assignment?

Expert’s Answer:  You are correct to imply that the reform of IR35 in the public sector is a game-changer. Not only does it create an entirely new variant of IR35 (for instance the loss of the 5% flat rate deduction), but also by making the engager and agency (the ‘fee-payer’) responsible has introduced new commercial considerations to the status decision.

So advice from accountants and status experts now needs to address IR35 and the public sector variant separately.

A true comparison between PSC and umbrella contracting under the April 6th public sector rules is that, largely, the financial outcome -- in terms of take-home pay -- is broadly the same. So when using your own company or an umbrella company, the main difference is between the umbrella company’s fee and the accountancy fee paid by the owner of the company.

A public sector contractor within IR35 has less administration using an umbrella. However, we think the contractor will still want to retain his company for non-IR35 contracts or non-public sector contracts, both of which are substantially better earners (as a PSC), than using an umbrella.

It won’t have escaped contractors’ attention that umbrellas are often criticised for using tax avoidance measures to increase take-home pay, and while such arrangements often don’t work, HMRC has been appallingly bad at addressing them.

As for commercial issues, we have seen many agencies seek to avoid their obligations under the April reforms and push contractors away from limited company working to umbrella company working, for all public-sector assignments. Agencies do so to remove all chance of claims for unlawful deductions; the risk of an incorrect assessment and the complexity of the calculations which their standard agency software does not address.

The true problem is the public sector has been allowed to make ‘across the board’ status decisions and not to understand their assessment obligations as intended. Sadly, HMRC and the government give the appearance of condoning this abuse. In many cases, public bodies won’t even apply HMRC’s own online status test.

Finally, in terms of the last query you raise, IR35 looks at assignments, notably where they are undertaken by a person via an intermediary (including a company), and specifically the basis on which the services are provided by that person to an engager, i.e. the working practices.

The expert was Paul Gough, managing director of contractor accountancy firm Intouch Accounting.

Wednesday 14th June 2017