Private Sector IR35 Reform: How Contractors can Prepare

IR35

The government’s consultation on IR35 reform in the private sector closed in August. If some commentators are correct, private-sector reform may be inevitable, and it’s likely to work in the same way as 2017’s public-sector reform. There is widespread concern about the damage such reform could do, and this has fuelled criticism of HMRC’s handling of the consultation.

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To be clear, we believe all stakeholders should continue to point out the flaws in the public sector implementation, and to offer reasonable alternatives for the private-sector, in an attempt to head off a repeat of the unintended, unfair consequences we saw in 2017.

That said, contractors are nothing if not pragmatic, and given the way the wind appears to be blowing it makes sense to assume the worst and take steps to protect yourself. At the earliest we can expect reform to take effect in April 2019, so what can you do between now and then?

Find out what your IR35 position is

Before you can decide what action to take, you need to understand your present position. IR35 is a complex piece of legislation, so we’d advise any contractor who trades though a limited company to get an independent assessment from an IR35 specialist. Your assessment should be revisited for each new contract, and certainly for each new client. This has always been sound advice, but it’s even more important in the context of potential private-sector reform.

Your assessment should include the reasons for your IR35 status and advice on how your position could be strengthened, for example with amendments to your contract, or changing your working practices. Whether you’re assessed as inside or outside IR35, make sure you understand why and that you can evidence your position if necessary. 

As part of the process of finding out your position, it’s also worth using HMRC’s online Check Employment Status for Tax (CEST) tool. CEST has been criticised since its launch in 2017 and you’re not required to use it or accept the answer it gives you. However, your agency or client may insist, so it’s advisable to at least find out what it says. The earlier you take the test, the more time you have to seek advice and make changes if you don’t get the “right” answer. Also, HMRC have promised to stand by the results of CEST, so an “outside IR35” assessment is a valuable thing to have.

Once you know your IR35 status, take appropriate action

Once you’ve received specialist advice and you’re clear on your IR35 position, it’s important that you listen to that advice. A clear “outside” assessment is your cue to gather as much evidence as you can to support your status. Refer to our Guide for details of what evidence will be helpful to you.

If your independent assessor believes you’re clearly inside IR35, we strongly advise that you act on their advice. Operating as if you’re outside IR35 when you’re actually inside could be very expensive in the long term. Additionally, if the expected reform does go ahead and a client assessment reveals your correct status, this could prompt HMRC to investigate and your position would be quite precarious.

Involve your agency and client

Recruitment agencies and end clients are concerned about IR35 reform as well. If reform gives them responsibility for assessing contractors’ IR35 status, an incorrect “outside IR35” assessment will carry a risk for them, while “inside” decisions will create extra work and increase their costs. It’s therefore very much in their interests to make sure your status is assessed correctly.

Assuming you expect to be working for the same agency and/or client in April 2019, it’s a good idea to speak to them now about how they intend to handle IR35 reform if it happens. Speaking to them early will allow you to address any concerns they have and make sure they understand your position if and when they have to assess your IR35 status.

What if your client insists that you work inside IR35?

This is the situation that most contractors are concerned about; if your client is made responsible for assessing your IR35 status, what if they get it wrong? As we’ve said, we believe a well-informed private-sector client will want to assess your status correctly so your best defence is to collaborate with your client and make sure they’re well informed. If they have concerns, your independent assessment and the evidence you’ve gathered could go a long way to resolving them, and the more time you give yourself the better chance you have.

If, despite your efforts, your agency or client insists that you work inside IR35 or use an umbrella company, you will see a reduction in your take-home pay and you might need to negotiate an uplift to your rate to offset this.

You’ll also need to consider what you’re going to do with your limited company, and this will depend on your circumstances. If you work for several different clients, you might find yourself sometimes working inside, and sometimes outside IR35. If you’re working outside IR35, your limited company is still the most tax-efficient way, while umbrella employment is often the better choice if you’re inside IR35.

If you’re lucky enough to be a client of Orange Genie Accountancy you can switch seamlessly between using your limited company and umbrella employment at no additional cost, which makes it much easier to manage a “mixed-status” situation.

If you have any questions about IR35 or if we can help in any way, please contact our expert team on 01296 468183 or email info@orangegenie.com

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