HMRC is turning the screw on contractors ahead of new tax rules that go to the very heart of what makes contracting so appealing to many people. You just have to look at what happened to contractors at GlaxoSmithKline to see which way the wind is blowing. So, with IR35 looming for the private sector, many IT contractors may be considering a potential move to permanent employment to avoid losing up to a quarter of their income in increased taxes. Here are the key considerations before you make your own decision.
1. What is IR35?
IR35 was originally introduced to tackle the problem of ‘deemed employment’. This is where organisations engage workers on a self-employed basis and usually through an intermediary, rather than on an employment contract, so they become deemed, or ‘disguised’, employees. If a contractor is found to be working within IR35, it can reduce net income by up to 25%, costing the typical limited company contractor thousands of pounds in additional income tax and National Insurance contributions.
For those whose contracting career occurred before IR35 had been conceived, the extension of this tax legislation to include the private sector from April 2020 raises questions that each contractor should answer sooner rather than later.
2. What are the benefits of being a contractor?
Being a contractor can be a challenge initially if you have been in charge of a team or a key decision maker, but once you get over that, contracting makes good sense. You can go home at night without the full responsibility of a project continuously gnawing at the back of your mind. The ability to work with a wide variety of clients is also attractive; typically doing the same job but at different locations and with different challenges. And of course, there are many ways an accountant could increase the amount of money in your pocket at the end of the year.
3. Are there downsides to contracting?
The endless search for new contracts, agencies’ promises turning to dust, the total lack of training and ability to progress one’s technical and professional capability and skills are all downsides for contractors. It might also be the case that sometimes you bring more knowledge and experience than the project manager, but are unable to influence key decisions.
4. How will IR35 affect private sector contractors?
Up to now, IR35 has only been widely applied to public sector bodies but the changes next year will see the net widening to cover the private sector. Many contractors moved away from public sector work to escape the risk of IR35, but this will no longer be possible. There is a huge amount of noise and confusion about IR35 and how it will impact contractors going forward. The following, however, is fact:
- Firms cannot avoid IR35 unless they employ contractors on fixed-rate contracts and therefore pay all employment-based taxes (which is the same as applying IR35 itself)
- When considering a case, the HMRC will attempt to disregard the actual contract in force between the contractor and the client and review the actual nature of the contractor/client working relationship to create what is known as a ‘notional contract’. This will be used by the HMRC to decide if the contract is a business-to-business service (IR35 does not apply) or is considered employment driven (IR35 does apply)
- HMRC reviews can be undertaken retrospectively which can be time-consuming and potentially expensive and stressful for the contractor.
5. Why is IR35 driving fear, uncertainty and doubt?
From next year IR35 will also be a headache for the private sector client. The effort associated with collecting and submitting tax and NICs to HMRC is being pushed back up the supply chain to intermediary organisations and ultimately to the engaging organisation or end client.
Many client companies view IR35 as a key risk for their business both from a financial and resourcing perspective. A nervousness is noticeable when reviewing IR35 requirements for next year. This may potentially result in organisations viewing the necessary level of administration, time and money as an overhead they are not prepared to bear. The net result is the reduction or removal of contractors who might be ‘caught’ by IR35,
Clients are also concerned that contractors or umbrella companies may increase their rates to compensate for loss of revenue.
6. Will IR35 be the demise of the vibrant UK contractor market?
Not necessarily as there will always be a need for capable highly skilled IT professionals who can fill that tactical gap which can’t for whatever reason be filled internally. However, the market is likely to shrink and not everyone will be able to find the kinds of contracts that are available today - for some contractors this may be an ideal time to take that leap of faith and secure your future by entering permanent employment.
At Edge Testing, for example, several associates have already decided to go permanent.
7. Why might contractors turn to permanent employment?
There are many attractive reasons to turn from contracting in the current employment climate:
- End clients no longer categorise you as an IR35 risk. We provide clients with a full managed service which is considered to be outside of IR35 rulings
- Access to a full training program that is aligned to strengthening current skillsets or introducing new skillsets
- Structured career path. Instead of being stuck at the same level for several years employees have plenty of options. They can work in more technically related roles such a performance testing, different industry sectors (Edge Testing is active in all main industry sectors) or perhaps a move into a management role
- Job security as a permanent member of staff. This was an important decision point for me as after six years I was becoming less enamoured with the contract agencies and also the risk of not being in work. I didn’t realise it at the time, but it was a big relief to get this monkey off my back.
- Varied engagements. Unlike many companies, we can offer a wide variety of work in many ways similar to what a contractor would experience over multiple contracts
Although IR35 is directly aimed at contract-based workers, it will be the risk-averse end clients that will push some contractors into the permanent job market. Doing this willingly by selecting a great employer will be a lot easier than grudgingly taking the king’s shilling.