Surviving IR35: The 2021 Contracting EcoSystem

IR35 Contracting Ecosystem

What is IR35?

IR35 is a set of tax laws which aim to prevent the self-employed contractor operating as a ‘disguised’ employee to avoid higher tax rates on their earnings. Those who fall inside of IR35 are subject to PAYE, those who do not are known as ‘off-payroll’ workers and enjoy more flexibility.

IR35 has applied within the public sector since 2017, but from 6 April 2021 the IR35 regulations now also apply to the private sector. So if you are a contractor operating through your own limited company, it’s important to consider what IR35 means for you.

What is the IR35 rule?

There are 3 key principles to IR35:

  1. The degree of supervision, direction and control the client has over the contractor
  2. Whether the contractor can substitute themselves
  3. ‘Mutuality of obligation’ between client and contractor.

If a contractor is directed as to how, when and where they complete their work, if they report to a line manager and attend team meetings, and if they must be on the client site at all times, they probably fall within IR35 – especially if the client would not accept an alternative individual completing the contracted work.

Who is responsible for determining IR35 compliance?

As the contract market considers how it can avoid being inside IR35, it is worth knowing that from 6 April 2021, the end-client will be responsible for determining whether a contract is inside or outside of IR35 – and the rules apply only to ‘medium or large’ businesses. If the end-client is a ‘small’ business (as defined by the Companies Act 2006) then the contractor, or ‘PSC’ (Person with Significant Control over a limited company), remains responsible for determining the IR35 status of a contract – in line with the existing rules.

To be deemed a ‘small’ business a company must meet two or more of the following criteria:

  1. Annual turnover is no more than £10.2 million
  2. Balance sheet total is no more than £5.1 million
  3. No more than 50 employees

IR35 – Friend or foe?

IR35 launched in the public sector in 2017. It is widely agreed that the sector was unprepared and there were significant levels of confusion at the time. Many contractors ceased working for the public sector, favouring a move to the private sector, which at that time was unaffected by the new legislation. There was evidence that some public sector organisations changed their people resource, moving to fixed term contractors to support them with their business challenges. It is anticipated that organisations within the private sector may also increasingly turn to management consultancies and fixed term contractors following the 6 April 2021 changes.

IR35 – A new era of opportunity

Is IR35 the end of contracting, negating the financial benefits of operating without the security of a permanent job? Or does it simply pave the way for a change in the contract market, away from large consultancies and towards networks of smaller specialists, who collaborate to best exploit the gig economy, ‘curating’ solutions for their larger onwards clients? Smaller, specialist consultancies may thrive under the new IR35 regime, attracting contractors who are concerned that they may be stung if they continue to operate as they have done previously. An ecosystem of niche organisations, working collaboratively, would surely create a win-win dynamic of bountiful opportunities for challenging and varied work, whilst allowing the consultancies to pursue markets, customers or projects which they otherwise could not access.

How to survive IR35

Some guidelines for contractors:

  • Contracts should be described as a ‘Contract for Services’ and clearly state the scope and services provided
  • Adopt a truly project-based approach
  • Invoice on completion of milestones
  • Work across a portfolio of clients where possible
  • Provide your own IT
  • Operating with a day rate can further differentiate from company employees
  • Maintain independence from a client’s corporate structure (not appearing on the organisation chart)
  • Do not include working hours or location (unless vital for security etc) in the contract
  • Ensure contracts have clear termination dates
  • Include a very short mutual notice period.

And lastly, try working for an organisation which sits outside of the legislation, like a smaller, specialist consultancy, who just may be about to transform the contracting market as we know it.

We're pleased to say that Barkers Commercial Consultancy sits outside of IR35

Our business model is such that our clients can rest assured that seeking professional support from Barkers will not put them in breach of IR35, whilst our Associates have the peace of mind that they are contracted to Barkers and can continue to provide excellent service to our diverse portfolio of clients.

At Barkers we are typically contracted to work with clients on defined and complex issues which may span across many business units within an organisation. By the very nature of the work required, this means our Associates are never filling a vacant permanent role within an organisation; our assignments are more fluid and diverse to reflect the complexity of the client’s challenge.

In addition, our Associates may be working with multiple clients at any one time. Our contracts explicitly state the remit of our Associates and outline the key milestones required to successfully achieve the desired outcomes. Barkers will agree with each client the appropriate milestones and we typically invoice upon achievement of these, rather than invoicing at regular interval periods. Contracts are terminated at the end of each assignment.

Whilst we work very closely with our clients, and understanding the organisation’s structure and processes is key to delivering optimum solutions for them, our Associates never appear on an organisational chart; they are contractually distant from the organisation’s core structure and do not receive employee benefits such as holiday pay, sick pay or pension payments. In addition, all Barkers’ Associates use their own equipment and software in a client setting, making them fully self-reliant and self-directing in the delivery of our assignments.

Finally, our business size also ensures that Barkers sits outside of IR35. We see this as a core strength. Our procurement consultancy carefully selects only the best procurement professionals from across the UK who are not only consultative but able to understand the clients’ key issues and provide optimum solutions. Our Associates collaborate and share best practice to ensure that clients benefit from a wealth of expertise.