Recruiters: What Happens if Your Contractors Are Inside IR35?

IR35

At the moment, if the end client is a private-sector organisation, you don’t need to worry about the contractor’s IR35 status, but that is due to change in April 2020, when private-sector IR35 reform comes in.

How to Help your Clients Prepare for IR35 Reform: Click here to download our free guide

We’ve talked a lot about the importance of ensuring IR35 status is assessed correctly for each individual contractor post IR35 reform, and we stand by everything we’ve said. Leaving aside the requirement for “reasonable care”, the risks of spiralling costs and losing access to key skills mean blanket “inside” assessments are not a viable solution.

But what happens when the comprehensive, individual assessment proves the contractor to be inside IR35? What options are available, and how should you advise your contractor?

They must remain compliant

If a contractor has been operating outside IR35 and are assessed as being inside, their take-home pay will fall, unless the rate is uplifted to compensate. The temptation to look for a solution to this is understandable but, if the IR35 assessment is correct, there is no legitimate way around it.

In the wake of the 2017 reform of IR35 in the Public sector, we saw an explosion of non-compliant schemes, designed to exploit desperate contractors seeking to restore their reduced incomes. We would be extremely surprised if the people behind these schemes were not poised to target private-sector contractors in the same way.

Legislation already exists to make recruiters responsible for tax evasion in their supply chains, so it’s already advisable to ensure every provider engaged by you or your contractors is an accredited member of FCSA. Post April 2020 it will be even more important to steer your contractors firmly away from non-compliant schemes, whatever spurious promises the scheme operators might make.

Using a PSC inside IR35

It’s perfectly possible for your contractors to continue trading through their Limited companies, even if they’re inside IR35. However, this option may leave contractors in a “no win” situation, paying broadly the same amount of tax as an employee, while enjoying no employment rights and still having the responsibilities and costs associated with running a PSC.

This option also relies on you having the necessary expertise and infrastructure to calculate PAYE tax and NICs, make the necessary deductions and pay them over to HMRC. It’s easy to imagine some recruiters being unwilling or unable to take on this additional work.

Contractors who expect future contracts to be outside IR35 may want to continue using their PSC. We’ll cover this issue in more detail later.

Umbrella employment

For those who expect to be inside IR35 for all their contracts, umbrella employment may be the best option. Again, we strongly advise that any umbrella company you work with should be a member of FCSA, as many non-compliant schemes have badged themselves as umbrella companies.

Most contractors will take home roughly the same amount through umbrella employment as they would trading inside IR35 through a Limited company, with the addition of full employment rights. These rights include sick pay, holiday pay, maternity/paternity pay and access to a workplace pension that their employer also contributes to.

Why not choose both?

Contractors who expect some of their future contracts to be outside IR35 may want to keep their PSC open and some providers are able to offer both. For example, Orange Genie Accountancy clients can switch to Orange Genie Umbrella at no additional cost, keeping their company open and available for when they need it.

If you have any questions or we can help in any way, please contact our expert team on 01296 468 483 or email andrew.webster@orangegenie.com.

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