With just six months until IR35 reform lands in the private sector, this notoriously complex and ambiguous tax legislation is causing huge headaches for contractors, many of whom are concerned that their clients will place them inside IR35 without hesitation in the coming months.
But is all lost? Or is there anything contractors can do right now to improve their chances of being deemed a genuine contractor and outside the clutches of IR35?
As any contractor worth their salt will know, to ensure that contracts you undertake do not fall inside IR35, you must demonstrate that you are genuinely self-employed – in other words, the service you provide your clients or the contract you sign cannot in any way resemble employment.
So in my opinion, a significant mindset shift from contractors is required. Having worked in this sector for decades, I know that many contractors want to operate as a business but haven’t – in my opinion – necessarily behaved like one. Far too often, contractors think and act like employees.
The problem is, to convince your client that you are a legitimate contractor who belongs outside IR35, you need to think and act as a consulting business. Of course, this is easier said than done, but it’s certainly achievable. Creating that distinction between being viewed as an employee or a business is critical in obtaining outside IR35 status. Remember, HMRC will pick up on the smallest factors, which you may not be aware of, putting you at risk of falling inside IR35.
However, there are clear and simple ways to help mitigate this risk – ones that are often ignored by contractors and limited company owners. I should probably add, that these are just my tips, and not a foolproof way to achieve an outside IR35 status post-April 2021. That said, the following will definitely help…
Employees get paid on time worked. They have a salary and this is paid for each day their core hours are worked. If they exceed expectations they may get a bonus. If they finish work early they are expected to complete further work because they are paid for their time.
In contrast, as a business owner, most of the time you are paid for the completion of tasks upon the completion of those tasks. For businesses, completing the project or task in less time is a bonus because you should be getting paid a fixed fee for that assignment.
Working this way this does require a significant mindset shift and one that involves taking more risks and setting boundaries with your client. They cannot tell you what to do, how and when to do it. If you complete the task you are paid to do, none of that should matter. If your client expects you to be at your virtual desk from 8:30 until 17:00 five days a week, you will have to explain to them that due to IR35, this isn’t possible.
A common issue that I often see is contractors wanting six-month contracts for security, as three months is deemed too short. Now, where in the business world would you ever find a similar response? As a business owner, you take risks day in day out and work without much, if any, real ‘job’ security.
If you value security above anything else, then you may be best suited to employment. If, on the other hand, you want to be a business, be prepared to take risks. This may mean discussing your working practices with your client and, in turn, lead to changes in your contract, but it could prove instrumental in safeguarding your outside IR35 status.
Employees have managers. Businesses have customers and clients. This is how you need to think and refer to them. A manager is a term of deference, and they are much more likely to tell you what and how to do tasks. A client is more of an equal. Start to think like this and you will notice a significant change in how you and your business are perceived.
Proper businesses incur many costs of sales – from staff to premises, hardware, insurance, licenses, marketing and so on. Ask yourself the question, what are your business expenses? Do you have any subcontracting fees? Do you have staff? Do you spend money on advertising and marketing?
Sure, you may have your accountant and insurance, but what else? A business website perhaps? Business domain email address? Any genuine business (even one-person companies) will have at least one of these listed as an additional expense.
From where I stand, this is the biggest challenge for contractors. My advice is to forget that Joe Bloggs, the individual, has been hired, because, in actual fact, Joe Bloggs Consulting Ltd has been engaged to deliver a project.
As a consulting business, you should be able to bring in outside help to assist you with the task that you have been contracted to complete. Certain aspects of this may not be within the core aspect of your skillset, so you need to identify how you can use the right of substitution to your advantage.
If the only way you generate leads is by putting your CV on a series of job boards or responding to job ads, then you are acting as an employee.
This differs enormously to the approach that a genuine service provider would and should take, where actual budgets would be in place to spend money on marketing and win clients, which is an important factor in determining that you are a legitimate business and belong outside IR35.
When I sign contracts or focus on business development, I always use my company email address. I would never consider using my personal one, which is why I find it so strange that in my experience around 80% of contractors do not even have a business email address.
Using an email address with a domain registered to the company backs up the notion that you are running a business, making it harder for you to be considered a disguised employee and inside IR35. Scotty2Hotty@live.com, I’m looking at you!
As we move into the paperless era, signing electronic contracts with a personal email is a big no-no, not only because it comes off as unprofessional, but because it also points towards an inside IR35 status.
This is probably one of the most common slip-ups made by contractors and one which is easily avoided. Having your own business website is vital (and also relatively easy and cheap). It immediately becomes clear that you represent the company. The content on the website is just as important. Always list the services your company provides and get rid of your CV.
Using an address that is either your home or accountant’s is also a mistake, in my opinion. To operate outside IR35 you need to paint a picture of self-employment – having a trading address contributes towards this. Doing this also highlights that you work from where you want, possibly even when you want – another sign that you could belong outside IR35.
A business is sometimes defined by its ability to generate revenue without the owner physically producing any work. When this scenario occurs, it’s blindingly obvious that you aren’t a disguised employee, meaning your chances of being classed outside IR35 increase exponentially.
I’m well aware that most of the above won’t happen overnight. But the key message to take away from this article is that if you don’t think and act like a business then how do you expect your client to see you as one?
This fundamental shift in thinking – from being an individual or a temp to a business owner – needs to take place. If your client sees you as a genuine business owner then you are one step closer to that outside IR35 determination.
This article was written by Ben Clark, CEO of The Sub Bench, which is a new concept that helps contractors legitimately promote their outside IR35 status. To learn more about how this service helps remove the notion of personal service, please click here.