IR35 - Where are we now?

The changes affecting limited company contractors working for public sector organisations will soon be with us. Transport for London (TfL) has already imposed a blanket ban on workers who operate through their own limited company. Under the reforms to be brought in on 6 April 2017 public bodies will for the first time become responsible for the difficult decision of assessing whether their limited company contractors fall inside or outside of IR35. 

A new on-line IR35 tool will be with us later this month. The question is whether other organisations will follow TfL's lead and "fail" contractors without even considering whether they are inside or outside of IR35 as determined by the new test. The consequences of failing the new test will be that contractors will be effectively forced on to the payroll of the end client and tax and national insurance will be deducted in the same way as if they were any employee. If an umbrella company is formed as part of the chain employers national insurance and the umbrella company's profit margin will also be deducted.

A recent illustration by an umbrella company for one of my public sector contractor clients saw him retaining just 52% of the gross income as net pay. If a public sector contractor is deemed to be outside of IR35 by the end client and continues to use his personal service company then the end client is likely to want to reduce the contractors hourly rate to reflect this so in this regard at least there is a level playing field in terms of working through an umbrella company or continuing to work through the personal service company. 

Contractors or contractor recruiters reading this may be switching off already if they are not involved with the public sector but I would advise against this. All the informed commentators in this arena are predicting that the the new IR35 rules will be applied to the private sector within twelve to eighteen months. Going forward contractors recruiters and end clients will need to work closely together. It is in the interest of all parties for contractors to be able to demonstrate that they are legitimately working outside the scope of the IR35 rules. This in practice will mean drawing up suitable contracts and ensuring that the contractors working practices accurately reflect the contractual terms.