IR35: Should you operate through an umbrella company or remain independent?
IR35 is a piece tax legislation introduced in 2000 designed to ensure ‘off-payroll’ workers pay ‘fair’ and equivalent tax and National Insurance contributions to full-time workers. The HMRC wanted to ensure that contractors and interims didn’t avoid paying a comparable level of tax by operating as a business when to all intents and purposes they are working as a full-time employee.
Before now, the onus fell on the contractor or interim to self-declare, however from April 2021 all medium to large-sized businesses within the private sector will have ultimate responsibility for determination on a contractor’s status falling inside or outside IR35. Misdeclaration, either on purpose or in error could see businesses incur penalties and fines and while they can dispute the HMRC judgment, this poses further burden and potential expense for businesses.
IR35 explained – what does it mean for contractors and interims?
IR35 definitions aren’t changing but responsibility over adherence to it will be. So, while contractors and interims still need to understand the regulations --to know if they sit inside or outside IR35 and position themselves to end-user businesses or clients clearly --businesses that utilise them will have a responsibility to ensure the contractor is compliant with regulatory directives.
Many risk-averse businesses may be tempted to move to a blanket approach and determine all contractors will fall within IR35 – they are concerned about the potential fines and/or the potential additional workloads that determination requires. However, in doing so, contractors will be charged a higher level of taxation – and therefore reduced overall net profit – forcing the question to be posed about who will bear the financial burden.
Finance and specialist interims and contractors are in high demand and this is likely to increase due to the unpredictability regarding macro-economic events, anticipated economic rebound and the need for specialist skills and strategic insight to accelerate projects that were put on hold during 2020. As supply and demand would suggest, end-user businesses will struggle to find the talent they need, creating the opportunity for contractors to negotiate their rate to account for the additional taxation. There is also the potential for interims to have a variable day rate – one for engagements falling outside of IR35 and a higher rate for those falling within. It is highly anticipated that the cost born to end-user businesses will increase.
What does IR35 mean for the interim manager?
Your IR35 status doesn’t change as a result of this update, although you will need to understand whether or not your assignment falls outside or inside IR35 (the latter meaning you are effectively working as an employee and therefore should be on PAYE).
When working as an interim for an organisation but not directly employed by the business you have the option to work for an IR35 umbrella company or as your own limited company. There are pros and cons to both, which one will be most suitable really depends on the way you work and approach your business.
An umbrella organisation is effectively an outsourced payroll for your contract work. They will pay all your tax and National Insurance – since 2007 they have been required to work under the PAYE system – therefore you will be working inside IR35 and won’t need to worry about compliance.
Working as a limited company works best for those operating outside IR35. The way you engage with an organisation should look distinctly different from the way permanent employees work – you are offering your services through your business and should be able to show legitimacy for this if required. This means you are responsible for the creation of the company, responsibility for accounts, tax payments, paying dividends and so on – basically, all the necessary paperwork and risk associated with running a business.
Are you better off navigating IR35 with an umbrella company?
Working under an umbrella company as a contractor means less hassle – you don’t need to worry about being IR35-compliant and you avoid the additional work that comes from operating as a limited business, as well as the risk.
If you are a long-term contractor legitimately outside IR35, however, then working through your own limited company might be a better proposition for you, as this will be of greater financial benefit than working through an umbrella company.
It is well worth contacting an interim service provider during this time – despite fluctuations in the UK employment market many providers are still operating, with new assignments and project briefs coming through on a daily basis – ourselves included!
We are always happy to offer advice and support regarding IR35 for interims, as well as any other concerns. The expertise Oakwood Resources has in the interim management market means we are best positioned to secure you the best assignments for your skillset, and to ensure success for both yourself and your stakeholders.
We work closely with interim managers, businesses, and consultancy firms to support their growth goals, matching the best professionals to exciting opportunities. If you wish to discuss interim management opportunities, please contact our specialist interim recruitment team who will be happy to talk with you.