IR35: The Public Sector Reform

Most people don't have the foggiest idea what IR35 is all about, but it is true to say that a vast number of freelancers whose businesses are incorporated are considered to be personal service companies (PSCs) because the director(s) personally generate more than half the company income. Whether intermediaries' legislation, commonly known as IR35, applies depends on an array of factors, but generally it won't apply if the following are true;

1. There is reasonable cause for supplying services through a limited company
2. The director(s) are not required to provide all the services personally
3. The director(s) do not work under a substantial level of control
4. The company shoulders a financial risk
5. The director(s) intention is to trade as a business

The government has recently made an announcement that the reform of intermediaries' legislation will be enforced on 6th April 2017, along with guidance on who is affected and who bears responsibility for managing the new system. At the moment only people working in the public sector are affected by the reform, which places a responsibility on the hirer to ensure that IR35 is considered before paying contractors through a PSC.

However, it is evident that when any contractor is paid through his or her PSC, as far as HMRC is concerned it is becoming necessary to talk in terms of being 'in business' rather than simply of 'self-employment'. There is an IR35 decision making tool which will be available soon, but it seems the consensus of opinion is that IR35 is too difficult to deal with, and more than a few public sector bodies are stating an intention to withdraw from engaging the services of professionals through a PSC. What a mistake!

The alternative is direct employment or an engagement through a PAYE umbrella company, neither of which is an attractive option for genuine freelancers, leading many contractors to walk away from public sector contracts.

For anyone who set up a limited company recently with no idea that IR35 was an issue, or for those who use a PSC just as a payment method, it probably is the right time to close the company or to operate IR35, which means treating more of income as employment income but retaining the freedom to choose when to work.

For contractors who know that all or at least the majority of the above factors are in evidence, then stand your ground and start to add weight to the factors that already apply to your situation.

One very simple solution is to create an association of professionals who supply the same or similar services, and ensure that when you are unable to perform the duties personally that any one of them can take your place. It is a good idea to use a third party to manage the administration, and to provide witnessed evidence that this happens in practise. (TAG Concepts is one such provider.)

In the public sector many of the contracts under which workers are engaged are specifically designed to pull workers inside IR35, this is because a worker engaged through a PSC that operates IR35 is a really safe way for companies to gain access to a flexible workforce with no employer costs or tax risk. Remember that in the days when companies often engaged workers through contracts that were 'IR35 proof', HMRC tended to ignore what was written in the contract and looked more at what happened in practise before making a decision, and likewise the use of the IR35 tool will overturn false IR35 contracts in the present day.

Contractors who can prove they are operating outside IR35 and now recognise the problem, can and should ask for a review of their contracts. But time is short and if you are required to operate IR35 until the matter is resolved, that is a temporary problem because you remain in control of your company, and when you have proof that IR35 does not apply no-one can force you to operate under that legislation, at which time all overpaid tax can be refunded to you through your company.

Call my office on 01268 745808 to arrange a chat with me if you are being affected by the off-payroll working reform and need to understand your options.