Who is this written for?
Anyone who is interested really, whether the upcoming changes in the legislation apply to you or not. It may appeal to recruiters or would-be clients so they can understand that not everyone who “contracts” is simply looking for a work around.
It will also be useful for people starting a business as a limited company because it illustrates how what’s best for your personal self and your business aren’t necessarily the same. As a sole company director and its sole employee can you reconcile this?
Need some background?
IR35 isn’t new, it’s nearly 20 years old. Introduced to ensure fairness of tax paid by employees vs. those supplying services through intermediaries. What HMRC want to eliminate is the practice of individuals and employers not paying the appropriate taxes if the contract is really an employment contract ‘in disguise’.
There’s nothing wrong with trying to raise more tax revenue, especially not with an abyss in health and social care funding. I’d prefer to see a widespread reconsideration of our taxation system. Growing numbers of people are opting out of traditional payroll employment, so maybe that’s another reason to review income taxation as a whole?
What’s changing in April 2020?
For private sector contracts with medium/large corporations the responsibility (and liability) for deciding if a contract is ‘inside’ or ‘outside’ switches from service provider to fee payer, i.e. the end client or another intermediary e.g. recruiter. Contracts falling inside means that the provider is treated as an employee, for tax purposes only.
I’m not an IR35 expert. I’m not yet sure how my business will change because not everything is my power to control. The very nature of the upcoming changes takes a responsibility that is currently mine and places it in another party’s hands. All I know is that I won’t intentionally break the rules, anyone who knows me well will agree with that.
How did I reach the point where IR35 may affect my business?
I decided against continuing to contract using umbrella companies because I don’t want to be an employee and want to build a business. Owning a business is an exciting challenge. I want flexibility: to work where, when & how I want; to blend paid work with volunteering; to work on a range of engagements that is impossible when employed.
Rewind to September 2018 when I was discussions with client #1. One reason that I decided to set up as a limited company rather than a sole trader (where IR35 doesn’t apply) is because the client preferred it. I also need limited liability - separation between personal and business that means I can’t lose my personal assets if the worst happens.
Now I have clients where IR35 does and doesn’t apply. I currently believe that I operate outside IR35 for the relevant engagements, although it’s not clear cut: I have multiple clients, sometimes at once and my contracts allow that. I bear some costs - phone, printing, insurance etc. I do choose where, when and how to work. All plus points.
The last point is interesting. For my contracts to date I would probably be providing services as a subject matter expert. To HMRC it’s less relevant then that I have this control, because similar autonomy would be expected of an expert, employee or not. There are many other factors to consider, you’ll fall asleep if I list them.
In short, there’s no neat formula, even the HMRC CEST tool is flawed! And that’s the thing. It’s tricky enough for me to weigh it all up for one contract. While I don’t applaud them for doing so I have some sympathy with businesses who have blanket-categorized roles or insisted that existing contractors move to payroll or terminate.
The fear for my business is not operating within the new legislation. It’s that the demand for my services from these clients will dwindle as they seek to circumnavigate a complicated process. I can’t see their genuine demand reducing, the nature of their businesses means that some flexible resources will always be useful to them.
What will I do?
I’d be able to do contract work inside IR35, lucky accountant. I’d be taking a financial hit unless I increased my rates – but I’m an economist and I’m not going to do that until I know what the market’s doing. But it’s more important to me that I continue to work flexibly. If that’s not possible I will continue to grow other parts of my business.
I’d prefer that corporation & dividend rates were aligned more closely with income taxation bands which would weaken HMRC’s argument that they are losing revenues and leave me free to run my business as I choose. It’s small fry anyway compared to the gains by tackling the large corps who really are playing the same system, legally.
I’ll try to remember to provide an update in a year or so. If my time as a business owner has taught me anything it’s that I have a far greater ability to adapt than I ever thought.