What would you do if, as a limited company contractor working outside IR35 in the private sector, next April you were faced with an ultimatum to either become a permanent employee or operate through an umbrella company?
After reports that several well-known financial services companies, including the likes of HSBC and Morgan Stanley, are preparing to stop engaging contractors outside the IR35 rules altogether, this is the dilemma that a number of independent workers might face.
From 6th April 2020, medium and large companies in the private sector will be tasked with setting the IR35 status of the contractors they engage. As part of these changes, the IR35 liability will also shift from the worker to whichever party operates as the fee-payer in the supply chain. More often than not, this will be the end-client or the recruitment agency.
Unsurprisingly, the agencies and end-clients that fail to give contractors the opportunity to operate outside the IR35 legislation look set to lose out. Should these companies hand contractors ultimatums, our study, in collaboration with Contractor Weekly, suggests that the vast majority (72%) of the 1200 independent professionals surveyed would leave that particular contract.
Such is the value that contractors place on independent working, only 10% said they would accept any offer from their client to become an employee. This was further emphasised by the 91% of the contractors who told us they take particular pride in working this way, with only 9% saying they see it as ‘just a job.’
Furthermore, the prospect of being forced to work through an umbrella company is nearly as unnappealing to this set of contractors as going employed, with just 18% stating they would do so. While umbrella companies offer a valuable service, it seems most contractors who provide their services as a genuine business are reluctant to work technically as employees of an umbrella, meaning they are taxed as such.
The additional costs involved when operating via an umbrella company means there is also a possibility that contractors opting to work through these vehicles could raise their rates significantly in order to ensure they take a similar amount home. Needless to say, this would increase the cost of hiring for the end-client.
In short, these statistics suggest that recruitment agencies and private sector engagers should plan for IR35 reform. They show us that contractors are not interested in stopping working independently to become employees when further IR35 changes are introduced next year.
Therefore, the medium and large companies that prepare for incoming IR35 changes, offer contractors the opportunity to have their tax status assessed fairly and allow these individuals to work outside the confines of the legislation will be better placed to attract them going forward.
While the prospect of private sector firms taking a risk-averse approach to IR35 changes is a concern, it should be said that these companies seem to be in the minority. Despite posing obvious challenges, it is widely expected that opportunities to work outside IR35 will continue to exist after the introduction of reform.
Learn more about QAccounting’s range of IR35 services here.