Contractors' Questions: Can I avoid IR35 entirely?
Contractor’s Question: I remember reading that the contractor sector and PSCs like myself were told to use the 12-month delay to private sector IR35 reform wisely, so what solutions have been found in that time to the off-payroll rules of April 6th 2021? In short, can I avoid IR35 entirely?
Expert’s Answer: If you are a contractor providing your services through an intermediary such as your own limited company, or personal service company (PSC), IR35 cannot and should not be avoided.
However by taking some time to understand the off-payroll rules, you can make an informed decision on how IR35 does or does not apply to your engagement, and how the legislation stands to affect the income you receive.
Wake up and smell the coffee
Firstly, you should appreciate that the IR35 rules are designed so that when the contract and working practices of an engagement reflect one of employment, the contract income received for that engagement should be treated as employment income for tax purposes. This status decision can be described as ‘caught by IR35’, or ‘inside IR35.’
Conversely, if the contract and working practices of an engagement does not reflect one of employment and can demonstrate that the contractor is truly in business of their own account, the status the decision would be described as ‘not caught by IR35’ or ‘outside IR35’.
How much being inside IR35 will cost contractors
When compared side-by-side, a contractor on a day rate of £500 could expect to take home anything from 10-24% more if the engagement were assessed as outside IR35 – i.e. not caught by the legislation.
But be aware, being outside IR35 is not avoiding IR35 -- it simply means that based on the evidence and facts, the IR35 rules have been considered to not apply to the engagement.
Remember, the IR35 rules are changing
From April 6th 2021, the rules are changing with the effect that all but the smallest of end-hiring organisations will now be required to conduct an IR35 assessment for each limited company contractor they engage.
The financial consequences of issuing an incorrect assessment can be severe, so it is widely expected that many new engagements will be offered as either ‘inside IR35,’ or only available on a PAYE basis.
Will a Statement of Work get around IR35?
Much has been mooted about moving to a ‘Statement of Work’ (SoW) contract, or operating as an outsourced ‘consultancy’, as a means to circumvent the new IR35 rules (from April), but beware – these routes should both come with a health warning.
These models rely on the services provided being deemed to be a ‘fully contracted-out service,’ as opposed to the provision of labour and when applied to the right situation and in the right way, they could indeed change the basis of how IR35 applies to the engagement. They can also bring considerable commercial risks that rest with the contractor.
Contractors should be wary that simply putting in place an SoW or outsourced consultancy agreement does not remove the requirement to consider IR35, and HMRC will easily see through any arrangement that is disguising the supply of labour.
IR35 is not there to be avoided or ignored. Quite the opposite. IR35 needs to be carefully considered, and as long as your status reflects the true working practices of the engagement, you should be just fine.
The expert was Chris Mattingly, chief executive of IR35 Navigator.