A Post-IR35 Solution for Contract Workers
Updated: Apr 17
Are you a contractor who is worried about your future status? Changes are undoubtedly coming and it is likely that changes are needed to the way you work if you would like to continue contracting. Read on to see how we expect the changes to play out and a solution for people who would like to continue contracting.
The impact of off-payroll working changes is still uncertain however It seems likely that blue-chip organisations and their shareholders will err on the side of caution. They have been using contract labour to de-risk their business models. Now it seems that incentive is largely negated as contract labour now comes with a risk of HMRC settlements and negative publicity.
There is a chance that contractors working on genuine project activities with a set deliverable and definite project end date might still fall outside IR35, but this will not be for human resources and legal departments to decide. One of the top legal people at a large UK retailer has told us they expect over 90% of contractors to fall inside IR35, however, their assessment is ongoing.
Likely impact on those inside IR35?
If your contract is not due to finish before April 2020 we would expect that employers or agencies will begin to deduct PAYE and NI before you receive payment, but how will this impact your bottom line and tax you pay:
· Expenses - It is likely you will be out of pocket for any expenses you normally deduct as these will not be taken into account for the PAYE and NI contributions.
· Employers NI - at 13.8% will have to be covered by the client so you should be not out of pocket for this. Until it comes to renegotiate at least when clients may look to pass this burden off their own Profit and loss accounts.
· Cashflow – whilst effectively being a PAYE employee you will need to wait a month until you get paid out as you will be still be getting paid a month in arrears.
Once your contract expires, it is possible clients will look to push the Employers NI cost onto contract workers through lower day rates. It is likely that contractors will be forced to take on this cost as with fewer contract roles available and a dearth of contract workers looking for options the laws of supply and demand indicate that rates will fall.
If the rates being paid for flexible workers fall there is no longer an incentive for contractors to accept day rate jobs. Many will decide to sign up to permanent contracts along with objectives, reviews and the whole nine yards.
Fixed Term Employment Contracts
Some employers may go down the route of fixed-term employment contracts. These are not very attractive to workers as the pay is equivalent to a permanent but probably without much of a bonus and they give employers flexibility up to a 2-year period. Fixed-term contract workers should be afforded all the same benefits as a permanent employee, but you will not be protected from redundancy until after 2 years.
If you are a contractor and would like to retain the advantages that come with contracting, you will need to change the way you are structured. HMRC is going after personal service companies that have only one employee who in their eyes should be employed directly by the client.
If you were to be employed in a company along with a couple of other people providing the same services to your client, your employer would cease to be a personal service company. The setup would be similar to a partnership, but employment would be through a limited company.
This model in effect is similar to the way lots of businesses are currently set-up across many industries meaning HMRC will have little grounds to challenge it. The challenge will be for contractors to take the step up and manage their work more outside of their client organisation.
The key characteristics of these consultancy entities would be:
· They would have a small number of shareholders
· Each shareholder would be paid a wage for work done and any profits accumulated in the business would be distributed through dividends
· Any differences in rates, seniority and days worked could be addressed through wages, shareholdings and potentially bonuses.
· Contracts would contain a clause that any shareholders who leave the business would need to sell their shares back to the company. Comprehensive contracts will be key to the success of this model so please talk to experienced contractor accountants about this.
· Companies can be set up in Ireland to take advantage of the low corporate tax rates. Shareholders would not necessarily be directors, so they would not need to attend board meetings etc in Ireland.
This is not an umbrella structure. The differences will be:
· There would only be a small number of employees in the company
· Each employee would be a shareholder so as they would be able to benefit from owning the business. There is no real tax advantage to being paid by an umbrella company and if there is you need to be sure that it is not a disguised loan scheme.
There is no doubt that change is coming to the way contractors structure their employment. The rules governing your employment may change so they will have to adapt in response. Instead of just contracting for an organisation you will have to take on the role of a proper consultant and not just think about your role look but look at the people sitting next to you and taking a step up the ladder.
Get in touch with North London Accountants MJH Accountancy if you would like more information about the consultancy model and a tax-efficient solution for setting yourself up post off-payroll working changes.