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When inside IR35 should I still work through my PSC?

Placed inside IR35? Should you sit tight or go umbrella?

Q. With IR35 reform on the horizon and with it an increased risk of being placed inside IR35 by my client, is there any point in continuing to operate through my Personal Service Company if I’m declared inside the legislation? Or would I be better off working via an umbrella company or even as a sole trader?

A. While the threat of being placed inside IR35 by your client could increase upon the arrival of IR35 reform on 6th April, that’s not to say you will definitely be caught by the legislation. Plenty of companies will assess your contract fairly and allow for outside IR35 engagements. 

However, if your contract is shifted inside IR35 by your client, there’s nothing stopping you from continuing to operate through your personal service company. Whether it’s worth your while from a financial perspective is another thing altogether, though.  

Contractors taking on contracts inside IR35 are well within their rights to increase their fees to take into account the significant cost of working inside IR35. That said, it could be difficult to negotiate this with your client. 

If this is the case, you’re left with a decision to make. Do you take the financial hit? Do you find another contract that will sit outside IR35? Do you source work through an umbrella company where IR35 doesn’t apply? Or, as you suggested, do you stop working through your limited company and become a sole trader?

When taking into account that thousands of outside IR35 opportunities will continue to exist after the introduction of reform, stopping working through your limited company altogether could be viewed as a rash move. In other words, you might be better off looking for another contract outside IR35 if your client won’t accept your revised rate. 

If you’d prefer to carry on working with the same client, operating through an umbrella company is certainly an option and given that it means IR35 isn’t taken into account – because you are perceived to be an employee of the umbrella company – it is something to consider. You will also receive certain employment rights. 

It is, however, also worth bearing in mind that you would incur other costs such as a fee to the umbrella company, which is either a fixed charge or a percentage of your earnings. You would also have to pay the apprenticeship levy. Much like working inside IR35, you will be subject to PAYE taxes too, which the umbrella company will deduct before paying you. 

When operating as a sole trader, the IR35 rules do not apply either. IR35 only applies to incorporated businesses. However, sole traders must be aware of employment status tests instead. These tests are very similar to the rules for deciding your IR35 status. So becoming a sole trader simply to avoid IR35 is fraught with risk. You can read more about this here. Additionally, you might find it difficult to retain your clients as a sole trader, given many businesses that regularly engage contractors will only do so when these workers are protected through a limited company. 

In conclusion, it boils down to your personal situation as to whether it makes financial sense to carry on working through your Personal Service Company on an inside IR35 contract. And while you might find it tricky to successfully raise your rate for inside IR35 contracts, it is our view that many private sector firms will be in a position to allow for outside IR35 opportunities going forward, meaning you can still operate with greater tax efficiency and enjoy the benefits of working through your limited company.

This answer was provided by IR35 specialist, Qdos Contractor.

By Contractor Doctor

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4 thoughts on “When inside IR35 should I still work through my PSC?”

  1. Like!! I blog quite often and I genuinely thank you for your information. The article has truly peaked my interest.

  2. Mike

    Thanks for the answer but I am still not clear. Given you are considering working on a contract that is deemed inside IR35, should you find an umbrella company or still use your existing limited company? Can you give examples of how each option would work (I am not clear how say a 3 month IT PM contract would work under IR35 through your own company). Are there any advantages? How do you pay yourself from your own company given PAYE/NI is already paid at source, etc?
    Thanks.

    • Felice

      Agreed Mike. Not sure I can see there’s any point in paying what is being deemed “a wage” into a company account – it effectively blurs all lines between what is ‘personal’ and what is ‘company’. Also, if it’s paid into the company account, will there still be an expectation that it should be declared at source on your personal tax return? Knowing HMRC, I suspect they will expect it to be declared on your personal tax return, regardless of where it actually goes.

  3. Peter Clareburt

    The problem with IR35 and contract thinking is that HMRC have stacked the game by considering each contract as a separate “business” with isolated tax considerations.

    I work with a small company who sell services and product and I help them sell and sometimes my services get sold in the mix of an assignment.

    So far in the last 12 months I have been on 9 separate contracts. Some of these just training where I have had to either use a pre-created course or I have had to tailor the course for different needs, different duration and different delivery mediums, i.e. at company location, at a training centre, and remote and a mix of training centre remote.

    I take these training assignments from time to time in between longer assignments. Even with longer assignments I might work at the same end client on multiple sepaate assignments over a period of months but often with different empathizes and different parts of the project as I apply specialist expertise to an area where they have no expertise and they don’t want to hold it.

    As part of design and implementation I apply learning to their in- house staff both, business and technical.

    Some assignments I carry out business development and may or may not win business. e.g. I went to a client in Ireland for two days, provided two days free consultancy at my expense and then a part time week preparing project plans and estimates, for no income, and some work at risk.
    – i.e. I would benefit with income should we win a contract of days delivering and expanding what I had prepared. We did not win that business, but we have won other business, and sometimes that involves multiple assignments over periods of time with down time in between.

    I have halted assignments in the middle for periods when the end clients are not ready rather than burn up time. I have halted assignments when we face a technical problem that requires research.

    I make these decisions autonomously and I am not compensated for any down time and often have to make good in my own time on some issues.

    So my productive time – i.e. when I do get longer periods of contract (i.e. paid days) subsidize the business development, the down time, the development and the research and the making good any issues that are laid at my door.

    This is a business that is continuous across paid assignments, and business development, and building product templates for future work. .e. more than just training but actually building stubs of work to be used.

    So if HMRC just look at my business on a contract by contract basis ignoring all the work in between – I have no chance and it simply does not reflect the nature of my business.

    I have been a consultancy practice manager, I have been a general manager of a Software company and I understand how the continuous nature of a sales and service business works and you cannot just count the income assignments when considering overall cost and overall margin.

    Really disappointed that HMRC are not able to distinguish between business as I work it and people who just body shop. Unfortunately I think they will destroy innovation, and that will be a significant cost to the country, far out weighing the anticipated tax income stream. Often the income stream just moves outside of the country but end clients can still offset these offshore expenses against local tax. This is a lose, lose, lose scenario.

    My longest contract since 2002 has been 2 years and that was the closest to body shopping, but even then there I was not controlled – I worked in a team but had autonomy to direct the way I work and what I delivered and how I augmented the team with new ideas, practice and in some case code, prepared outside of the assignment.

    My average contract length is probably a month – with a few at 6 months and a couple longer.

    Anyway – I have pretty much given up as it is all getting too hard and I am getting close to retirement. I have been in this business for nearly 40 years roughly 50/50 permanent/contracting.

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