IR35: Are You In, or Are You Out?

Since posting last week’s article on the suppressed UK IT job market, many conversations seem to have focused on IR35, and how it is relevant in the current market.

So, this follow-up is going to dig into the complexities of IR35, its impact on contractors, professional services companies, clients and businesses. I’ll also focus on strategies for all of us to navigate this complex environment.

A Brief Overview

So, I need to start by acknowledging not everyone reading this will know what IR35 is, and why it is significant. Let’s tackle that first.

Introduced in 2000, IR35 targets "disguised employment," where individuals supply services through an intermediary, such as a personal service company (PSC), but operate similarly to employees. The legislation distinguishes between:

· Inside IR35: Contractors deemed employees for tax purposes, subject to PAYE (Pay as You Earn) and National Insurance contributions.

· Outside IR35: Contractors operating as self-employed, responsible for their own tax affairs.

There are several factors or criteria for determining whether an engagement is inside or outside IR35. Historically the key ones have been as follows. But this is a changing situation with recent rulings.

· Control: The degree of autonomy over how, when, and where work is performed.

· Substitution: The right to provide a substitute to carry out the work.

· Mutuality of Obligation: The obligation for the employer to provide work and for the worker to accept it. Notably, the CEST tool does not look at Mutuality as a factor for determination.

The focus now seems to be much more on the ‘in-business’ factors, with the best acronym ever, IBOYOA! These are things you would not expect to be true for an employed person, things like:

· Using your own equipment

· Having your own business insurances

· Raising invoices for any work you complete

· Being responsible for any defective work

· Being free to engage in other business

The Impact of IR35 on IT Contractors

Why is this a consideration? For IT contractors, being classified as inside IR35 has a significant financial implication, including the following:

· Increased Tax: Going inside IR35 will almost certainly result in higher income tax and National Insurance contributions, reducing net income.

· Admin Challenges: It will likely mean additional effort for your accountant, to work through the tax regulations and ensuring compliance.

· Market Perception: I’m not sure about this one, but I mention it because other people do. Some believe there is a potential issue with marketability, if we are perceived as employed, but I have never seen this.

Business Responses to IR35

IR35 is not new, but it is regularly changing, and IR35 requires companies to keep up to date, and accurately assess the employment status of contractors and consultants. The reality is many businesses struggle to confidently understand and implement these rules.

Some organisations have even adopted blanket policies, classifying all contractors as inside IR35 to mitigate risk. This approach does simplify compliance, but it presents other challenges.

· Talent: Some of the best consultants and contractors are firmly sticking to only outside IR35 engagements. Many are also flexible, but a blanket policy on only inside IR35 could create a challenge in attracting and retaining the right skills and individuals.

· Increased Cost: Simply put, a blanket inside IR35 policy is liable to result in higher costs, as contractors need to compensate for the increase in taxes.

So, considering the previous article, the combination of IR35 and the current economic pressures, such as inflation and budget constraints, has resulted in real challenges for businesses.

· Complexity of Rules: Difficulty interpreting and applying IR35 criteria.

· Assessments: Necessity for thorough evaluations of each contractor's status.

· Risk of Penalties: Financial and reputational repercussions for misclassification.

Also, as announced in the Autumn Budget, HMRC is increasing efforts to enforce IR35 compliance, including recruiting additional inspectors and focusing on umbrella companies that fail to adhere to regulations.

Strategies

I promised my viewpoint, and strategies to navigate this current environment. I’ll split this up, strategies for businesses, and strategies for consultants.

If you are a business, challenge your professional services partners and check how knowledgeable they are on IR35 and how robust their processes are. If you find yourself in the unenviable situation of receiving a letter from HMRC, this is what they are going to ask.

The OPW (Off Payroll Working) Check letter from HMRC is going to contain around 12 or 13 questions to check your processes, and those of your supply chain.

So, my first recommendation, is carefully chose partners who can demonstrate a solid, consistent, comprehensive, third-party verified, insured approach to IR35 determination and a partner that ensures subsequent behaviours match the findings.

My recommendation to contractors is slightly different, prepare yourself now. Don’t wait until you are considering opportunities to understand what the implications are for you personally of being inside IR35. I have had several conversations with contractors recently who have not considered the implications of an inside IR35 opportunity and have had to wait for their accountant to get back to them. I’d suggest don’t wait, figure it out now. I can’t say what your decision should be, but you should be as confident in this decision, as you would be for any other aspect of your professional life.

Also, maintain clear evidence of your independent status. Think about the ‘in-business’ factors mentioned above. This could make you an attractive prospect for potential clients.

Conclusion

Navigating the complex changing landscape of IR35 in a suppressed market is going to require adaptability, knowledge, confidence in your partners, and solid processes. All of us need to stay informed and up to date with the rules, assess engagements carefully, and make certain we have compliance strategies to mitigate all the risks. If you need help, or you have any questions and thoughts, let me know.