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Barclays, GSK and RBS are just some of the high-profile businesses that have recently confirmed they will stop engaging limited company contractors in 2020 as a direct result of the private sector off-payroll reforms, known as IR35. These damaging moves are forcing many contractors operating personal service companies to review their options, with many having to consider joining the client’s payroll (going PAYE), or using an umbrella company service.


Contractors are being advised to prepare themselves as best as they can. Here’s what to do if you find yourself affected.


Why are companies against outside IR35 contracting?

The negative impact of IR35 reforms have already been felt in the public sector. Originally, IR35 employment status was declared by the contractor and not the hiring organisation. When the rules changed in 2017, the onus shifted to the hiring company to determine their contractors’ IR35 status, which meant they were now liable for tax and National Insurance Contributions should the contractor be deemed to fall within IR35. Many organisations, including HMRC, NHS and MOD, decided it made hiring contractors a riskier business and ceased using any limited company contractors.

It seems that private sector organisations now feel the same way. Many are choosing to take a risk-averse approach, seeing stopping engaging limited company contractors as the easiest and safest option. However, experts like Larsen Howie’s Head of Tax, Andy Vessey ATT, disagree, saying that it’s a bad business move for companies to rule out a flexible, specialised workforce. Not only will they lose out on the skills and flexibility that contact workers bring, but the financial rewards reaped when compliantly engaging independent workers outside IR35.


What approach are these companies taking instead?

The specific working arrangements vary from business to business, but generally speaking, firms like GSK and RBS have said they will stop engaging contractors operating through personal services companies outside IR35. Others are asking the contractors to work through an Umbrella company.


What choices do contractors have next?

While these changes are worrying, contractors do still have a choice about what to do next. They can choose to accept their client’s strategy and become an employee (PAYE), they can decide to work via an umbrella company or they can leave the organisation and find new clients that are more flexible.

Some hope that businesses will reverse their decisions as time goes on, but unfortunately for the foreseeable future, IR35 is going to continue to be a headache for contractors.


Becoming an employee

Should you decide to become an employee of a company, you are no longer technically a contractor. For many contractors, then, this is far from ideal as they would have to sacrifice their independence and leave other projects and clients.

It’s worth bearing in mind that if you do decide to go down this route, HMRC has assured contractors and hiring companies that it will not investigate previous contracts prior to 6 April 2020, even if they fell inside IR35. Experts say that HMRC has done this to encourage more contractors to move onto their client’s payroll and pay more tax.

Should you choose to become an employee, you may also decide that you want to close or put your limited company into a dormant state.


Working via an umbrella company

Another option available to contractors is to work via an umbrella company. This arrangement means that you’ll be able to continue to retain the flexibility to work on other contracts with other clients. But you will be required to pay employment taxes as well as a service charge, which could significantly impact how much pay you take home.

Contracting via an umbrella company affects you in other ways too. Namely, you won’t have the same level of responsibility. So, while you can still choose what work you take on and how you operate, in essence the umbrella company will treat you as an employee.


Continue operating outside of IR35

If your client allows this option,  you can decide to continue working as a contractor via your limited company, all is not lost. There should still be plenty of opportunities to operate outside IR35 after April 2020; you may just need to find new clients that are willing to be more flexible.

Before going down this route, it’s important that you’re fully aware of how you to determine your employment status for tax purposes and ensure you adhere to the IR35 rules every time you take on a new contract. Here are some steps you can take:


  • Take the IR35 CEST test: To find out if you are inside or outside IR35, you can use HMRC’s Check Employment Status for Tax test to assess your current work practices. It’s worth knowing, though, that this test has been criticised for being too broad, and therefore inaccurate, and although it’s been reviewed, experts still recommend that contractors consult an expert to help them determine their IR35 status on each project.


  • Set up a Statement of Work (SoW) agreement: Genuine SoW arrangements fall outside IR35 and move any future IR35 risk down the supply chain. They set out how work should be completed during a specific project and are proving an increasingly popular way for businesses to engage contractors, giving them greater structure and visibility of their off-payroll engagements.


  • Seek expert advice: With tools like CEST still deemed inaccurate, it’s worth consulting an IR35 tax specialist for advice before changing how you work or taking on new contracts. Experts like Larsen Howie can help you ensure that you are compliant with IR35 and other laws and regulations, giving you peace of mind as you run your business.


To find out more about topics related to contracting, IR35 and more browse our blog or you can also get in touch with our experts to discuss how IR35 will impact you.