With the IR35 dragnet scheduled for expansion in April 2020 to include private sector contractors, self-employed people across Britain are facing the very real possibility of having to pay HMRC thousands of pounds’ worth of additional tax. This is particularly a concern if you provide your services to your clients through intermediaries such as your own limited company, since HMRC may well deem you to be nothing more than a glorified employee and therefore demand that you pay PAYE tax as a result.

While that outcome could end up costing you a significant sum from your yearly earnings, there are ways around IR35. From joining the payroll of your biggest customers to adjusting the terms of the contracts you hold with them to enrolling in an umbrella company, there are several options available to you if you’re looking to extricate yourself from the mess and stress of battling IR35 litigation. Let’s take a closer look at those three options in particular:

Joining a PAYE payroll

IR35 was originally introduced to prevent self-employed people from paying tax and National Insurance contributions (NICs) via the use of intermediary entities. If you do away with those entities altogether and simply join the payroll of your biggest customer(s), you will eliminate the need for IR35 altogether.

Of course, this will incur a significant change to your current set-up. You’ll no longer have the freedom and flexibility that you enjoyed as a self-employed individual and will severely limit your options. What’s more, your customers might not be too keen on the arrangement, either, since it will involve higher costs for them in the form of NICs, holiday pay, sick pay, maternity or paternity pay, pension contributions and any other statutory benefits that they will be obliged to give you.

As such, this is one of the ways around IR35 – but it’s quite a drastic one which many people will not find palatable because it simply eliminates the problem, rather than solving it.

Amending your contracts

A secondary option could be to examine the existing contracts that you have with all of your clients and, where appropriate, amend them to ensure they fall outside of the remit of IR35 legislation. If you do go down this route, it’s imperative that you take great care with the wording of these contracts to ensure that you not only avoid any IR35 pitfalls, but also do not contravene any of HMRC’s other rules. In particular, you will want to pay close attention to:

  • It should be made absolutely clear in the terms of service that the contractor – and not the client – has control over where, when and how the work is undertaken. Control is deemed as one of the key indicators of whether a contract falls within IR35 or not, so be sure to only ever complete the job for which you were hired and never let a client dictate your workload. Similarly, it’s professional courtesy to inform your clients about any upcoming holidays, but never ask permission to take them.
  • Another red flag which signals a “disguised employee” (and therefore one liable to IR35) is whether or not you are able to send a substitute in your place to carry out the task agreed upon. If you are not, it suggests you are providing a personal service and are therefore contracted; if you are, you can’t possibly be an employee. Avoid being named personally in the contract itself, try and include a “right of substitution clause” if possible or, better yet, use a substitute for a job.
  • Mutuality of obligation. Steer well clear of any contracts in which your client is obligated to find you work and you are obliged to complete it, since this is clear evidence that you fulfil the role of an employee. Such an arrangement is known as “mutuality of obligation” (or MOO) and is used as a yardstick for employment by HMRC regularly. Meanwhile, do not let your client insist that you work exclusively with them, as this is another sure-fire indicator of “disguised employment”.

It’s a good idea to involve a trained professional, such as your accountant or an expert in IR35 law, to review the contracts after redrafting but prior to signing. While there is no such thing as a contract that’s completely IR35-proof, having yours professionally reviewed will significantly increase your chances of avoiding HMRC’s searchlight when it comes to clamping down on IR35 regulations.

Joining an umbrella company

Perhaps the easiest and most effective way around IR35 is via an umbrella company. These are firms who “hire” self-employed individuals to their payroll and designate them as an employee in the eyes of HMRC, thus bypassing the need for IR35 altogether.

However, unlike option one above, an umbrella company does not inhibit your freedom or reduce your autonomy. You can continue in your professional endeavours in much the same way as before – selecting your own clients, dictating your terms and organising your own schedule. The only difference is that now, you’ll be required to submit regular invoices to the umbrella company, not the end client, and must pay a fee to the former for their services.

In return, the umbrella company provides screening from IR35 legislation, as well as a host of other benefits. Not only will they grant you all of the statutory benefits listed above, but they’ll also take care of your tax returns, handle invoicing and chase up late payments from clients. As such, they’re a one-stop shop in reducing the headaches and stress associated not only with IR35, but the self-employed lifestyle in general.

Comparing umbrella companies

Having said all that, it’s important to recognise that not all umbrella companies operate in the same way. Some will offer a basic package which does not provide all of the services listed above, some will provide a more comprehensive deal which goes above and beyond, and many others will fall some way between the two extremes. Using a comparison tool, such as Umbrella Broker, can help to distinguish between the different options on offer and find the firm that’s right for you.