Public Sector Contractors: Top tips for avoiding IR35
From April, contractors working in the public sector will lose the right to determine their own IR35 status. As a consequence, thousands of PSC contractors could see their take home pay reduced.
In many cases it is feared that the legitimate contractors will be caught out by the reforms and unfairly end up on inside-IR35 contract and paying a heavy price for it.
There are, however, some ways that contractors can try to avoid IR35 and, if inevitable, mitigate the impact of an imposed inside-IR35 contract.
Speak to your client
While a lot of the analysis and comment on this issue has so far come from a contractor’s point of view, few people have stopped to look at the issue from the engager’s standpoint.
Many public sector clients will be dreading the introduction of this new legislation. Not only will they have the extra administrative burden but, as many experts believe, they could suddenly see contractor costs rise and find it more difficult to hire talent.
Speaking to any public sector clients about how they intend to apply the rules will help you gain some clarity about the future and may present an opportunity to redefine your arrangement with the company.
The IR35 question is essentially a legal one, so to prove that you are outside IR35 then you will need to gather as much evidence as possible.
HMRC’s evidence will come from its Employment Status Service (ESS) tool, that the public sector can use to test IR35 status. However, many experts believe that this tool will determine an IR35 status will only judge a tiny percentage of contractors outside IR35 and deliver verdicts that a contrary to case law.
Your alternative evidence can include all sorts, from a copy of the original contract, notes from conversations with the engager (particularly those related to hours worked), emails from the engager, timesheets, invoices, photographs from job sites.
This kind of evidence will form an IR35 compliance file and can be used to argue your case with the public sector body and, if necessary, with the courts.
Ask an expert
There is no question about it, IR35 legislation is complicated. And in this case, when there could be huge implications for your future income, it will pay to get expert help.
At Umbrella.co.uk our team of qualified accountants offer customers advice wherever possible to help them maximise tax efficiency and avoid nasty surprises. If you have any specific questions relating to your individual circumstances then please get in touch.
If it seems like it is impossible to avoid the IR35 tax trap then you should move on and take steps to mitigate the legislation’s impact.
In some cases, it may be possible to move away from servicing public sector clients and move towards the private sector instead. For many contractors this will obviously be easier said than done, but acting straight away will put you in the most positive position by April.
It is, however, worthwhile remembering that many experts predict that the public sector rules will be transplanted to the private sector in the not-too-distant future. So any gains made from switching to the private sector may only be temporary.
It may also be possible to increase your rates in line with lost take-home pay. Again though, this may be difficult to achieve in practice.
For many contractors, continuing to operate through a personal service company (PSC) will no longer be the most tax-efficient option.
Switching to an umbrella scheme would mean that contractors pay the same tax and National Insurance contributions as under a PSC arrangement but would get access to employment benefits like holiday pay and pension contributions.
For more information and advice please contact a member of the Umbrella.co.uk team. Call 0800 121 6513.