Key advice to contractors ahead of the IR35 private sector reforms

On 11th July, it was confirmed in HMRC’s draft legislation that their controversial off-payroll rules will be extended to the private sector in April 2020. Although this will be disappointing to many, it hardly will come as a surprise, and now the private sector will need to prepare for the task ahead.

This legislation will mean that from April 2020, the responsibility of assessing contractor’s IR35 status will shift from the contractors themselves to the medium and large businesses that engage them, and the tax liability will shift from the contractor to the fee payer.

James Foster, the Senior Commercial Manager at Optionis Group and holding company for SJD Accountancy, gives some key advice that private sector contractors should consider when planning ahead for the change.

Understanding what determines your IR35 status

There are three key factors that are used to determine whether your assignments are inside or outside IR35. These are:

  • Direction and control, which is concerned with how much control your client has over the way in which you work (i.e. do you have reasonable autonomy in the methods you choose to complete tasks)
  • Substitution, which looks at whether you can supply a replacement to undertake your work, if you can’t fulfil your duties
  • Mutuality of obligation, which is concerned with whether your client requires you to complete a specific task, or if there’s scope to go on to do additional work

There are additional factors such as whether you use your own equipment, whether you’re in business on your own account, whether you have financial risk etc.

It’s important to note that HMRC would look at not just your contract, but also your working practices so it’s imperative that your working practices also reflect that you are not a ‘disguised employee’.

Understanding what will happen to your contracts from April 2020

When the private sector reform is rolled out in April 2020, the responsibility for determining your IR35 status lies with the end client. Therefore, they will need to decide whether you are operating outside of IR35 and you’re viewed as a genuine business, or whether you are operating inside IR35 and instead you’re seen as a disguised employee. So even if you are confident that you are currently operating outside of IR35, this decision will ultimately fall with your end client (this applies to companies above 50 staff or over £10.2 million turnover).

Looking at the roll out of the IR35 reform to the public sector, some engagers looked to make what they saw as the most risk-averse decision by making a blanket decision that all their off-payroll contracts are inside IR35. In many cases, by not taking reasonable care to assess individual statuses, this had an adverse impact as public sector companies lost valuable contractors as a result. If lessons are not learned from this by the private sector, we could see the same blanket decisions made by private businesses. Therefore, you should not assume your status prior to your end client informing you of their decision. 

If your end client determines your status as outside, you can continue to invoice from your limited company and pay your own salary and dividends, whilst being responsible for your own taxes. However, if you’re found to be inside IR35, your fee payer will be responsible for deducting NI and PAYE (as is the case for employees).

In the result of an inside IR35 status decision, you would likely see your take-home pay being reduced. So you would need to renegotiate your rates to achieve the same take-home pay or look at your options elsewhere.

Getting the right advice

To make sure you’re prepared for the reform and any other relevant legislation, and don’t have any hidden surprises, it’s advisable to do your research or speak to an expert, like an accountant. They can provide advice on what you should do to make sure you stay on the right side of HMRC by paying the correct tax, while ensuring you’re operating in a way that makes the most of your money where possible. 

Further Reading

Private Sector IR35 Reform

Contractor’s guide to working inside IR35