We often mention the importance of ensuring IR35 status is assessed correctly for each individual contractor post IR35 reform, but what happens when the comprehensive, individual assessment proves the contractor to be inside IR35? What options are available, and how should you advise your contractors in this situation?
They must remain compliant
If a contractor has been operating outside IR35 and are assessed as being inside, their take-home pay will fall, unless the rate is uplifted to compensate. The temptation to look for a solution to this is understandable but, if the IR35 assessment is correct, there is no legitimate way around it.
We've already seen an explosion of non-compliant schemes, designed to exploit desperate contractors seeking to restore their reduced incomes, and we're very concerned for those contractors who get involved with them, as the consequences could be very dire indeed.
Legislation already exists to make recruiters responsible for tax evasion in their supply chains, so it’s already advisable to ensure every provider engaged by you or your contractors is fully compliant.
Using a PSC inside IR35
It’s perfectly possible for your contractors to continue trading through their Limited companies, even if they’re inside IR35. However, this option may leave contractors in a “no win” situation, paying broadly the same amount of tax as an employee, while enjoying no employment rights and effectively running their PSC on taxed income.
This option also relies on you having the necessary expertise and infrastructure to calculate PAYE tax and NICs, make the necessary deductions and pay them over to HMRC. It’s easy to imagine some recruiters being unwilling or unable to take on this additional work.
Contractors who expect future contracts to be outside IR35 may want to continue using their PSC. We’ll cover this issue in more detail later.
Umbrella employment
For those who expect to be inside IR35 for all their contracts, umbrella employment may be the best option. Again, we strongly advise that any umbrella company you work with is fully compliant, as many non-compliant schemes have badged themselves as umbrella companies.
Most contractors will take home roughly the same amount through umbrella employment as they would trading inside IR35 through a Limited company, with the addition of full employment rights. These rights include sick pay, holiday pay, maternity/paternity pay and access to a workplace pension that their employer also contributes to.
Why not choose both?
Contractors who expect some of their future contracts to be outside IR35 may want to keep their PSC open and some providers are able to offer both. For example, Orange Genie Accountancy clients can switch to Orange Genie Umbrella at no additional cost, keeping their company open and available for when they need it.
If you have questions about this issue, or if we can help in any way, please contact our expert team on 01296 468 483 or email info@orangegenie.com.