What are your thoughts on the future of contracting now IR35 (private sector) is coming into play?

Question submission date: March 2021

Full Question: What are your thoughts on the future of contracting now IR35 (private sector) is coming into play? Any words of advice?

IR35 has, to date, been met with much trepidation. It’s been that awkward subject that many do not enjoy discussing. Thankfully though, that reputation is being replaced with one that is far less intimidating as people realise that it is not something that needs not to be feared, just understood.

The responsibility for ensuring the correct IR35 status in the public sector has been with the engager since 2017. The private sector will move in line with the public sector from 06 April 2021 with the IR35 status of a contract shifting from the freelance individual to being determined by the company engaging them. They will also, therefore, be responsible for paying relevant tax on behalf of the freelancer and be liable if their status is deemed incorrect by HMRC.

The latest research undertaken by us here at Integro Accounting showed that nearly three quarters of respondents, taken at the end of 2020, will continue working as a freelancer. It was heartening to know that nearly 52% will continue freelancing through 2021 using their limited company, nearly 6% using their limited company inside IR35, nearly 10% using an umbrella company and nearly 4% using agency PAYE.

A recap of the differences between working inside, and outside of, IR35.

Just over 66% of respondents work in the private sector, the majority of those enjoying being freelancers due to the flexibility that it affords them, and over 75% actively chose to go into contracting.

The most tax efficient way of contracting is outside of IR35 through your own limited company. While, as a limited company, you don’t receive the same perks and benefits as an employee, you can usually command a higher rate of pay. Payments taken from the company can be made as a combination of salary and dividends, meaning a saving on tax. A large range of company expenses can also be claimed and you can take advantage of the flat rate VAT scheme.

Contracting inside of IR35 means that, for tax purposes, you are deemed for tax purposes an employee of the end client which means you’re subject to PAYE. Working inside IR35 via your own company comes with few benefits, the main one being able to take full advantage of the flat rate VAT scheme; previously you had the ability to claim on basic company expenses, this is no longer the case. Whilst this may not be cost effective for long haul contracts, keeping your limited company open offers greater flexibility should your next contract find itself outside IR35.

Some companies are sadly making hasty ‘blanket decisions’ whereby PSC’s will not be considered for projects forcing freelancers to use an umbrella company. If you are being ‘nudged’ in this direction it is worth understanding the difference between agency and Umbrella PAYE if this is your only option.

Typically, the agency PAYE route offers a lower rate. You would go through the agency payroll and they would deduct PAYE and NI contributions before giving you your payslip. This will be your taxable salary and is usually on par with what you would receive if you were in standard employment.

Umbrella PAYE is usually inflated to consider additional deductions. Operating this way means you are presented with a contract rate which is usually higher than a taxable salary. Employers NI, Apprenticeship Levy and the Umbrella margin are deducted before reaching your taxable salary.

Take control and talk to your end client.

IR35 has been around for a while now. It’s taken some time for people to become more familiar with what it means and thankfully it hasn’t proved to be the problem that it was originally considered to be. If you haven’t done so already, now is the time to take control. You can do this by talking to your end client (or potential end client), your agency, and getting your status checked and finding out how they are determining your contract. They will be deciding whether your contract is inside or outside, and you want to be sure that you understand their reasoning so you can confidently ask any questions, if you have them, about their decision.

Utilise online tools.

There are a number of online tools that will enable you to check your status. While we wouldn’t suggest you rely on them solely, do utilise them coupled with talking to an expert.

HMRC have their own online tool – CEST (Check Employment Status for Tax). While it is useful, HMRC have said that if your IR35 status is challenged, the tool provides no support. You can also get your status checked with well-known insurance providers, such as Kingsbridge, who will be able to offer comprehensive, practical advice. The Kingsbridge Status Tool asks around 30 carefully worded yes/no questions that will ascertain an IR35 status. If it’s clear-cut, the tool will generate an instant result along with a comprehensive report that outlines the notable positives and negatives of your engagement. If it’s a borderline result, an in-house IR35 specialist will give a manual review. Kingsbridge are currently offering this FREE to Integro clients – click below to get started.