Changes to the off-payroll legislation have arrived in the private sector and, after a highly-anticipated two years of waiting, contractors are now left considering what their best working options are.
The new rules mean, that unless you are engaged by a ‘small’ company, your client is now responsible for determining your employment status – whether or not your contract is caught by IR35.
Some larger clients are asking contractors to work via umbrella companies – certainly in the short-term. Others are happy for contractors to work via their own limited companies. You may still have a choice over the type of business structure you use.
In this article, James Foster, Technical Commercial Manager at SJD Accountancy, explores the benefits and drawbacks of the various methods of contracting below.
Working through a personal service company
Ultimately, the IR35 reforms are being introduced to encourage more compliant working across the industry and to prevent disguised employment. For those contractors whose contracts all currently fall outside of IR35, this status should remain the same post-April if the nature of the contracts undertaken is the same and the assignments are assessed using reasonable care, both before and after the reforms.
Where this is the case, continuing to work through a personal service company (PSC) is likely to be the most cost-effective option.
Should a contractor want to continue working through their PSC, they need to undertake a thorough assessment of their current contracts, as well as any future ones that are already planning to take on. Working out the status of these contracts, as well as the line being taken in those sectors – for example, being aware of companies that have implemented blanket bans – is crucial to working cost-effectively.
If the contracts you have in the pipeline will be deemed outside IR35 and it’s possible to continue securing similar contracts in the industry you operate, then there’s no reason for contractors to consider a different way of working.
Dual contracting packages
Following the IR35 announcement, some of the market’s accountancy providers and umbrella companies revealed the creation of new dual contracting solutions that combine limited company and umbrella employment working styles.
This type of accountancy package allows contractors and freelancers to work through their own limited companies when a contract is deemed outside IR35, while also offering an option to transfer to an umbrella company set-up if another contract falls inside IR35. This is a viable way to continue contracting as it allows PSC directors to continue operating through their company, yet ensures they have a compliant option should they receive a status determination statement (SDS) that falls inside IR35.
Dual contracting solutions are expected to become an increasingly popular choice for contractors post-April because of their flexibility, enabling them to take up contracts inside and outside of IR35 simultaneously. Most packages on offer also cite that the transition between contracts is easy and seamless, requiring minimal input from the contractor.
Working via an umbrella company automatically removes the IR35 risk for contractors because the umbrella company becomes the employer, so is responsible for deducting taxes and National Insurance contributions.
A contractor needs to be aware of any assignment rate included and so will need to request a Key Information Document for umbrella employment.
When working through an umbrella company, employer’s NI contributions, apprenticeship levy, workplace pension contributions and holiday pay should all included within the rate paid to the umbrella employer, alongside your gross pay.
Although working through an umbrella company means paying more tax and National Insurance contributions when working outside of IR35, this way of working also offers employment-related benefits, such as sick pay and full employment rights. This should always be factored into any decisions made by a contractor when considering the best method of working.
Take a look at this popular article – 20 things to consider when choosing an umbrella company.
Consider your long-term career plan
With IR35 changing the way that contractors operate, individuals need to consider their long-term career goals sooner rather than later. This will enable contractors to make informed decisions as to their way of working.
If a contractor knows that the vast majority of their income comes through contracts that fall outside IR35 and this is not set to change any time soon, there’s little reason to alter their contracting method.
Whereas, if a contractor has assessed their working landscape and realises many of their contracts will be affected, either by an inside IR35 SDS or via companies that engage them implementing blanket bans, considering switching to umbrella could be the most viable option.
If a contractor anticipates a mixture of both inside and outside IR35, they should research the best dual solutions on the market.
For all IR35-related advice and guidance, you should speak to a qualified accountant. You can find out more on the SJD Accountancy website.
For ultimate peace of mind and defence in the event of an IR35 investigation, take out Qdos’ award-winning IR35 insurance – from just £99 per year. This covers up to £50,000 of professional representation and potential tax liabilities up to your chosen level of indemnity.