Dear Contractor Doctor
I’ve been working for the same client, via my own limited company and an agency, for the last seven years. From the outset I decided that my contract was inside IR35, and instructed my accountant to ensure the necessary tax payments were made.
But I recently asked my agency and client about holiday pay. Both responded that, as a contractor and not an employee except of my own company, I don’t qualify for any. In fact, the agency suggested that its contracts are ‘IR35 friendly’, so should I be paying extra tax at all? It seems to me that under IR35 I have the worst of both worlds: I pay taxes like an employee but enjoy none of the benefits.
What are my options?
Contractor Doctor says:
There are plenty of options for contractors who consider themselves to be inside IR35, or who have had their contract and working practices evaluated by an expert who has come to the same conclusion.
IR35 is very expensive and offers absolutely no benefits to contractors who pay it, even if it is designed to make ‘disguised employees’ pay employment taxes on their income. Contractor Calculator’s online IR35 calculator demonstrates how much more of their earnings a contractor can keep in their pocket by staying outside IR35.
The good news is that there are several strategies that contractors can adopt if they find themselves in a long-term IR35 trap and either want to escape it or want to enjoy the employment benefits they are paying their taxes for.
Try to get the tax back by using IR35 experts
A lot can change over the course of seven years, and a contract that started off inside IR35 may not still be inside after seven years. Seeking a review of contracts and working practices by an IR35 expert could clarify the contractor’s position.
The good news is that there are several strategies that contractors can adopt if they find themselves in a long-term IR35 trap
If the review concludes that the contractor is outside IR35, then it is possible to try and get some of the tax back. There are IR35 consultancies that have enjoyed success at doing this on behalf of contractor clients.
Certainly the contractor, if outside IR35, should immediately stop making the deemed payment or paying themselves a full salary and start paying themselves using the low salary and dividend route.
Change contracts and working practices to put yourself outside IR35, or move
Should the expert IR35 review conclude that the contract remains inside IR35, then the contractor’s strategy should be to change their contract and working practices so that they are outside the legislation.
This could be relatively straightforward. At the next contract renewal, the contractor could ask for a contract review and change or amend the existing contract. They could also ensure that their working arrangements with the client are transformed.
This may involve some changes in behaviour, demonstrating things like a lack of control, no mutuality of obligation and possibly even sending in a substitute or hiring a helper.
If none of these work, or are not practical or possible, then the simplest solution is probably to move and find a new contract. With the possibility of taking home as much as 25% more money, this is well worth considering.
Take a risk, and just stop paying, but adopt IR35 best practice
A contractor could simply decide to stop paying IR35 taxes. With only around 250 new IR35 reviews opened by HMRC each year, the chances of being investigated are very slim, so some may think it worth taking the risk.
If this course of action is chosen, then it is sensible to take other precautions, such as adopting IR35 best practice, taking out tax investigation insurance and also considering insurance to pay for the tax and penalties if an IR35 case is lost. Basic PCG membership will provides many of those benefits.
This is in fact the strategy that most contractors adopt, whether they are inside IR35 or not. Remember, the chances of being in a car crash are also slim, but drivers still need to insure against it.
IR35 mitigation is not tax evasion, it is tax management
IR35 is so subjective and governed by such complex case law that the only definitive way to determine IR35 status is to go before a tribunal judge. Most contractors with professional expert representation and who have adopted IR35 best practice throughout their contracts usually win.
So, before it gets to that stage, it is effectively the contractor’s choice as to the course of action they take. They should then advise their accountant accordingly and make sure they have a good defence to support that choice if HMRC decides to investigate.
Start using an umbrella company
Another option for a contractor to consider if they are truly well inside IR35, and also want to gain some employment benefits from all the income tax and National Insurance Contributions (NICs) they are paying, is to join a reputable umbrella company.
Umbrella company contractors are employed by their umbrella company for the duration of their contract. This means they enjoy full employment rights and benefits, although of course these are mostly paid for out of the contractor’s gross fees.
Contractors definitely inside IR35 and likely to remain there over the long-term are most likely to be better off trading via an umbrella company rather than using their own limited company.