Anybody who is working as an interim, contractor or even an independent consultant, should have heard of IR35.  IR35 is an HMRC regulation that seeks to ensure that taxes relating to employment can’t be avoided by the use of an intermediate company.  Many of you will be aware that a new regulation is coming in very soon, (spring 2020), which will move the onus of IR35 compliance from you as the service provider to the ultimate consumer of your service.   Intermediaries such as agencies and umbrella companies will also have much more responsibility.   This article explains the problem and offers an alternative that gives you the greatest opportunity to continue to provide your service as a business.

The Employer Challenge

This change was first implemented in the government funded sector and employers took a very conservative attitude and determined to avoid any risk of HMRC liabilities or penalties.  They moved all their flexible workers on to an employee payroll basis.   We are already seeing this policy adopted by many large corporates as well as the agencies that supply them.  Although a recent government announcement has suggested that HMRC will not apply penalties in the first year, if you get it wrong as an employer you may still have to pay Employers National Insurance, Employees National Insurance, Employer Auto Enrollment Pension Contributions, Holiday Pay and Employee Income Tax.  If HMRC choose to investigate, they could assess a liability for the previous seven years.  For the employer, even if the likelihood of getting it wrong is low, the liability if you do get it wrong could be punitive.

The Flexible Worker Challenge

For the interim, contractor or independent consultant, this change in status from business services provider to employee can have a devastating effect on take home pay.  Firstly expenses: suddenly you lose the benefit of treating travel, subsistence and overnight accommodation as a business expense.  You cannot claim any of these if they are associated with attending your ‘normal place of work’.  You lose the benefits of trading through a limited company where typically you will draw a salary to match your income tax personal allowance and distribute the balance by way of dividend.  Very few corporates are prepared to pay rates for flexible workers that will restore your ‘take home’ income to its previous level.

A portfolio executive workstyle could avoid the new IR35 regulations

I would encourage you to use this threat to your income as a prompt to re-examine whether a portfolio executive workstyle is the best answer for a sustainable, rewarding future.

Take the opportunity to take a long hard look as to whether being an interim, contractor, independent consultant or even a non-executive director (many NEDs are moving onto payroll) is the right answer for you.  We encourage portfolio executives to have four to six  part-time clients in the SME sector. Typically, the best organisations for a portfolio executive will have a turnover of £1m-£10m.  The Small Company Exemption for the new IR35 employer regulations is £10.3 million!  You will still have to ensure that you can defend your ‘outside’ IR35 status to HMRC, but your clients are not going to face the risk that HMRC will be after them.

What could this actually mean for an individual?

To give you an example, I saw a recent post by an independent contractor on LinkedIn who is currently trading through a limited company.   Outside IR35, working locally to Sheffield, he could make a reasonable living on £435 a day.  Working in London, inside IR35 (i.e. on payroll) he would need to charge £850 – £950 a day for an equivalent income.  Could you charge twice as much?  He is a senior professional with a rich set of skills, knowledge and experience with a specialism suited to short assignments.

Part of that difference is holiday pay, sick pay, continuous professional development, pension contributions and downtime. But it is also the costs of hotel, travel and subsistence that are no longer tax deductible.  Finally, there is the tax costs of employee/employer national insurance contributions on so much more of his income.

Take a long hard look

It will take a while for the market to settle down. If you are an existing interim, contractor or independent consultant, there will be two immediate impacts: one is the reluctance for people to engage you and the second is that your effective take home pay in the short term will be substantially reduced.

So, I would strongly recommend you to review our on-demand webinar about your 2nd half career and consider whether a portfolio executive workstyle is still right for you.

Charles McLachlan is the founder of FuturePerfect and on a mission to transform the future of work and business. The Portfolio Executive programme is a new initiative to help executives build a sustainable and impactful second-half-career. Creating an alternative future takes imagination, design, organisation and many other thinking skills. Charles is happy to lend them to you.