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Will ir35 affect the private sector?

Published on: 9 Nov 2017

Will ir35 affect the private sector?

With the recent changes to IR35 in the public sector taking hold, thoughts often turn to whether the same changes will take hold in the private sector.

Whilst the private sector might be difficult to crack from an IR35 perspective due to the number of self employed voters who MPs want to stay on the good side of; if re-elected for another 5 year term, MPs might be prepared to take the risk of upsetting some of these voters early on in the hope that the impact of the IR35 changes will subside by the time these voters next go to the polls.

If the IR35 changes prove to be successful in the public sector, this gives the Treasury a compelling argument to expand the changes to the private sector and it is expected that the tax yield from the private sector reforms will be significantly higher than the yield from the public sector which could be easily spun into more hospital beds, childcare places, employment rights, etc.

In which case, what can contractors do now to future proof themselves from more IR35 changes? As well as ensuring the IR35 basics are all covered, it’s worth rising your contracting game to become more entrepreneurial. Whilst the law relating to IR35 hasn’t changed, HMRC are clearly looking for contractors to demonstrate more than just not being a disguised employee. Focusing on the standard IR35 tests (substitution, control etc) puts contractors into a ‘maybe captured’ bracket for HMRC which gives them an argument to run against you. Whereas demonstrating that you are acting in business of your own account pushes you more firmly into the ‘not captured’ bracket.

Being caught by IR35 doesn’t prevent you from working through your company, but it will mean that you lose the tax advantages associated with this way of working and ultimately, could leave you worse off than a PAYE position due to the costs associated with running the company which simply don’t exist for employed roles. Therefore, simply using a company as a payment vehicle won’t be enough to survive future changes to IR35; it has got to be run as a genuine business. Taking steps now to adjust how you run your company will ensure that you are viewed by clients as a genuine consultant and not just part of the ordinary workforce. In doing so, you are more likely to survive IR35 version 3.0.

The IR35 basics will always apply to any piece of work undertaken, so becoming familiar with issues such as control, substitution and financial risk remain key. However, for genuine contractors who make the lifestyle choice of working flexibly, varying the clients they engage with and who see themselves as truly independent from their client’s businesses, withdrawing all available income from all work undertaken is far from the best way to run a business.

The following tips will help you to take your IR35 compliance to the next level:

1. ISSUE YOUR OWN TERMS OF BUSINESS

This isn’t always possible when using recruitment agents to find work on your behalf and this isn’t going to automatically mean that you are caught by IR35 if you don’t do it.

However, having key commercial terms which are vitally important to your business and which you negotiate into all of your supply contracts will support you in being a genuine consultant and may also help you to manage the assignment your way.

Such terms may include capping liability to your insurance limits; being specific on the deliverables required on each assignment and perhaps allocating a charge for each; setting payment terms; listing equipment you will be responsible for providing; noting that the services will be delivered away from the client’s premises at your discretion and/or specifying that you will use your own premises for some/all of the work.

You don’t have to amend the recruiters template terms to incorporate your requirements, many have a ‘Special Terms’ section where they can be added, or simply documenting your terms and getting them signed off by both parties confirms they are agreed as part of the project and will help you to evidence to HMRC that you negotiate your contract terms on a commercial basis. It all helps to distinguish you from a disguised employee.

2. INVEST IN YOUR BUSINESS

If you withdraw all available income from your business (less anything set aside for taxes) will leave you with little, if any, resource to invest in your company and develop the services you can offer to clients.

Setting aside a percentage of your income for training and development, investing in equipment essential to getting the job done efficiently; employing an apprentice, will all help to change the way you deliver your services and increase the revenue from clients. Work smarter, not harder.

3. PUT A BUSINESS PLAN TOGETHER

This will certainly help with item 2 above initially as it will give you an idea how you can afford to pay for future investment and gives you a plan. Having 2-3 year projections will give you and your business targets. It will also identify risks to your business which could hamper efforts to meet your targets, but again, these become great investment opportunities and are ultimately intended to grow your business.

4. DONT DO THIS ALONE

Get some help! Whether it’s employing an apprentice to support your work, or paying an administrator a few hours each week to look after the paperwork for you, having someone else in your business changes your mindset. The company isn’t just a payment vehicle anymore.

If you work alongside other contractors, see if there is any benefit to you sharing the cost of an administrator for your businesses. Whilst you may not be able to offer full time hours to someone, you and 3 or 4 other businesses may be able to cover the cost and provide the work.

Teaming up with like-minded contractors enables you to take advantage of economies of scale. View it as a partnership whereby both directors/shareholders generate income, share costs and ultimately withdraw dividends based on their value and contribution to the business.

5. DON’T PUT ALL OF YOUR EGGS IN ONE BASKET

Being busy is what most contractors set out to achieve. Although, when they have work on, they stop looking for more until their current project is coming to an end.

Keep your eyes open for further work. Build up your networks of both referrers of work and also competitor contractors.

Commit to short term projects. If you are offered a long term assignment, don’t do it full time as you need to allow some time for you to run your business and ultimately you will have no time available to support your other clients. If you don’t look after your clients, someone else will.

If you can’t do a project right now, don’t turn it down but suggest another contractor who might be able to pick it up. You may be able to agree a payment from the other contractor for putting him forward (hey, recruiters do this, so why can’t you), or at very least you will have built up good will with someone who may be able to return the favour for you. You have also kept your client happy and engaged with you.

Continue to raise your company’s profile. You may find that there is a lot of demand for your specialist services, in which case, employ someone who you can train to be equally as good as you are and double your business’ turnover. The more assignments you can undertake, the better for your business and your IR35 status.

Over the last 20 years Brookson have helped over 90,000 self-employed professionals, just like you, work compliantly whilst maximising their take home pay. We provide proactive support and advice to ensure our customers are always in the know.