Surviving IR35 reform as a contractor – part 2
So you’ve spoken to your agency and client about potential IR35 reform in the private sector; asked about ‘Statement of Arrangements’ and even run CEST to see what it says -- as recommended in part one, writes Graham Fisher, chief executive of Orange Genie.
So what’s next? Broadly, you need to know the answers to three questions:
1. What if you’re forced ‘inside’ IR35 when you’re not?
2. Should you close your limited company?
3. When should you use ‘alternative’ arrangements?
If your client or agency insists, before or after an extension of the April 2017 off-payroll rules to the private sector, either that you work as if you’re ‘inside’ IR35, or that you use an umbrella company, your first task should be to find out what’s driving that decision.
If they have concerns about the risks to their business, the independent status assessment and the evidence you’ve gathered (both recommended in part one) may be enough to change their mind. Again, the key is to talk to them early on to give you the best chance of resolving the issue.
If you do find yourself switching to umbrella because your client or agency sees you as inside IR35, or just won’t tolerate PSC usage, you can expect your take-home pay to drop. So you’ll very likely want to negotiate an uplift to your pay rate to offset this. A specialist contractor accountant will be able to calculate the required uplift based on your specific circumstances.
Letting go of ‘Ltd’
As to whether contractors who find themselves in the above scenario should close their limited company, it really depends. If you are ‘outside’ IR35, working through a limited company remains the most tax-efficient way, and if you work for several different clients, you might want to keep your limited company open.
You may undertake a mixture of ‘inside’ and ‘outside’ IR35 contracts simultaneously or switch regularly between the two. In both cases however, your tax planning may be more complicated. That said, a good specialist accountant can help and may even offer a ‘switching’ service between Umbrella/PAYE and PSC/Accountancy models, allowing you to show compliance based on the status of assignments you go forward for. There shouldn’t necessarily be an extra cost to use such a switch model. Ask about any switching facility if you’re new to choosing an umbrella company for your future contracts. The prospect of the public sector’s April 2017 off-payroll rules being extended to the private sector has made these models more popular, more available than they were just a few months back.
Following the public sector reforms, we saw an explosion of non-compliant tax avoidance schemes, set up to take advantage of contractors who had seen their income drop. Many contractors were drawn in by claims that the schemes could reduce their tax bills, and many have since paid the price.
HMRC is specifically targeting tax avoidance schemes and the consequences for getting involved in them can be extremely serious. As a general rule of thumb, if the main selling point is a reduction in your tax bill you should proceed with extreme caution, and any scheme that attempts to disguise your earned income as a loan should be avoided at all costs.
These schemes are likely to continue and outwardly offer ‘solutions to potential private sector IR35 reform.’ Don’t be tempted -- both HMRC and industry captains agree, if the ‘scheme’ or ‘model’ or ‘service’ looks too good to be true, then it probably is. Our answer therefore to question three, posed at the outset, is ‘Never.’
IR35 reform checklist
There’s been lots of guidance from us in both part one of this guide, and in this part two. To recap, the following checklist brings together the actions we highly recommend contractors take as a bear minimum to prepare for ‘inevitable’ IR35 reform in the private sector:
- Make sure you understand your status and if you’re outside IR35 make sure you have evidence to support it. Where possible get an assessment from an independent, respected IR35 specialist.
- Take HMRC’s CEST test. Seek advice if you get the ‘wrong’ answer. Can you ‘pass’ the test with a few tweaks to your working practices?
- Talk to your client and agency. Remember, they want the ‘right’ answer too!
- Consider what you’d do if your client found you inside IR35. Do you have evidence that might convince them otherwise? Are they correct? Do you need to consider your options elsewhere or with your PSC? Could you negotiate an uplifted rate?
- Stay away from tax avoidance schemes – they will cost you more in the long term.