IR35: Contractors, it’s time to switch your business head on

We’re not the first to call IT contractors to reprogram their thinking and working practices to become truly bonafide businesses, with the effect of making IR35 almost a non-issue and hopefully for the future of PSCs, we won’t be the last, writes Adam Topham of 34Square.

Let me explain. Post-April 6th 2021 there was a hope, expectation and even a reasoned argument, that contractors could kick back and let medium and large engagers shoulder the burden of IR35.

Adding insult to injury? PSCs paying for their own status test

However in shouldering that burden, and sometimes making agencies alleviate it, contractors have recently found themselves asked to foot the bill for their own IR35 assessment. Or arguably worse for some, who don’t get the option and are just forced inside.

Many contractors feel resentment towards client organisations that have overnight switched to insisting on inside IR35 via an umbrella company. Surely that’s UK Plc turning its back on contractors and shirking their responsibilities under the new off-payroll legislation?

Another question, if I may, before some answers from me. Is it really an understandable, justifiable position for contractors to adopt -- this resenting of those businesses asking them to fork out, up to £100 say, to have their IR35 status assessed? Personally, I don’t believe it is an overreaction for contractors to feel aggrieved to pay for a status test. It makes sense and, after a torrid year for contracting, it’s possibly unavoidable that some contractors will just vote with their feet.

Shake it off, and make the switch

However, I believe we need to shake off feelings of resentment, no matter how understandable. Contractors should shift their thinking to a truly commercial mindset.

Making that shift begins with departing from the notion that IR35 legislation is there to restrict or prevent contractors from operating through their own limited companies. This thinking has no doubt been fuelled by high profile HMRC-bashing and constant protesting against IR35.

And yet, in over 20 years of this legislation, the UK has an enormous freelance contractor workforce percentage compared to most other countries in Europe, and in fact the world.

To me, it all means that to make the shift to the truly business mindset, contractors and even us advisers need to start regarding IR35 as an enabling framework. The legislation of 2000; of 2017 and of 2021, sets out the conditions for operating via a limited company. At the heart of these conditions is the concept that if a contractor is genuinely selling their services as a business, then theoretically what they are doing is totally legitimate.

As a business, would you not just do all you can to remove trade barriers?

As we approach IR35 reform’s first year anniversary in April 2022, we’d urge contractors to think as business owners, not as individuals. Think of clients as clients, not as employers. Similarly, contractors ought to think about marketing; about customer service; about removing barriers to organisations buying services from their independent companies.

If not, those barriers will remain in place and we must then all ACCEPT that UK plc will continue to gravitate towards buying from contractors on an inside IR35 basis only.

Assuming you agree PSCs should make more of a demonstrable shift to the ‘in business on one’s own account’ ethos and operation, is it really a justifiable position that a business cost of £30, £70 even £100, is an unreasonable speculation to help safeguard the future of a limited company? Before you answer, consider pitting that maximum £100 outlay to test your IR35 status against making five hundred times that amount, or upwards, on the subsequent assignment. Take this argument a little further, and to paraphrase one contractor, “should we not be seeking out every conceivable and reasonable opportunity to make it easier for clients to buy from our limited companies?”

When assessments you pay for are overly regular, pricey or unpredictable

So while I think bonafide contractors with nothing to fear should, in the grand scheme of things, have little issue with paying for assessments, doing so will be much, much less palatable where those assessments are unpredictable; overly regular, or expensive. Also less-than-agreeable , if  the result is an inside IR35 verdict that helps none of the parties. But, contractors do have options (including voting with their feet). For example, where it genuinely can befeasible, explore new ways of working, including substitution, which would could see such a verdict switched to the far more equitable outside IR35.

In our view, Substitution is widely misunderstood, especially by clients. It is, in fact, essentially a service- benefit to clients. It assures that contractual obligations can still be met, even if the main resource is unavoidably unavailable at a critical time. The contractor, via their limited company, remains responsible for solving that problem for the client, should it arise. Perhaps if you yourself fully understand the right of substitution, you can help to encourage your clients to embrace it.

But as the Dave Clark IR35 case highlights, make sure you get substitution right if that’s going to be your play. Contractors need to be able to properly demonstrate that they could execute such a substitution in the manner HMRC expects. This, by the way, is not as straightforward as it sounds. Limited companies wanting outside IR35 Status Determination Statements need to shoulder the burden of being able to PROVE they can sub, even if they never have done so to date.

Final thought

Clients can and will keep engaging contractors outside IR35. Many that have stopped really can start up again. But if the professional contractor community don’t start taking responsibility as business owners, and start properly thinking about and speaking out about how to make it easier for clients to buy from their limited companies, then in the next five or 10 years, outside IR35 may dwindle to being an exception, despite the fact that for probably millions of engagements over that period, it should be the rule.