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IR35 opportunities for small businesses

Charlie Wood, head of contract division at Head Resourcing

On 6th April 2020, changes to IR35 will come into effect, meaning the vast majority of contractors working through a personal service company (PSC) will no longer be responsible for determining their own IR35 status; this responsibility will now lie with the client engaging the contractors services.

However, assessing the IR35 status of a contractor is no easy task. Even HMRC’s own online tool, CEST, relies heavily on certain areas of the legislation and gives very little weight to one of the most fundamental aspects of IR35 altogether – mutuality of obligation. In addition, CEST, by HMRC’s own admission, cannot provide an answer in 15% of cases.

With limited support for businesses to determine IR35 status, and large fines for getting it wrong (recent cases of IR35 liability have amounted to over £1m), many large firms (HSBC, Barclays, Vodafone, RBS) have stated they will no longer engage with contractors working under PSCs, as the investment in resources needed to assess the IR35 status of each contractor is too great.

Contractors determined to continue working with large businesses can rid themselves of PSC status and instead work with an umbrella company, which acts as a temporary employer, negating the need for assessments as IR35 legislation applies only to contractors engaging through PSCs. The impact and difference in take-home earnings compared to their Limited company is likely to be 10-20% less for the contractor, making this a less attractive option.

So, if many contractors decide to retain PSC status, and are no longer engaging with the large businesses, there is going to be an opportunity for small businesses, which are exempt from the new off-payroll worker rules, to reap the rewards of this previously unavailable top-talent.

The proposed changes to the off-payroll worker rules (IR35) apply only to ‘medium’ and ‘large’ businesses, with an exemption for end-clients with two of the following: no more than £10.2 million annual turnover; a balance sheet total of less than £5.1 million or no more than 50 employees. Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of a contract remains with the PSC and the changes do not apply.

Now is the time for those small businesses to look at their long-term plans and consider the benefits of engaging with contractors. Contractors are faced with limited choices; stop working through their PSC and work with an umbrella company / go PAYE, find an employer who is assessing the IR35 status of each individual, or work with small companies exempt from these changes.

Small businesses should view the upcoming changes as an opportunity to absorb some of the most talented contractors in their sector.

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