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.