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IR35, time for a rethink?

(Image credit: Image Credit: SFIO CRACHO / Shutterstock)

IR35 is the most hated legislation in the IT industry, more so since off-payroll working arrived in the public sector contracts. James Poyser, CEO of inniAccounts says change is inevitable in a time of austerity, but even so isn’t it time to get over it?    

IR35. How did two letters and two numbers wind up being the most hated? A law that strikes fear into the hearts of would-be contractors and makes those who have already made the switch from ‘permie’ to consultant think twice. 

Ok, perhaps IR35 isn’t the only thing preventing people from changing their career path, but it certainly won’t be helping.   

 It can feel like a risk to make the change from a secure job with paid holiday, sickness and gym membership, but for many people the lure of being their own boss is strong.   

It became so strong that 17 years ago, the government thought people were doing it for the wrong reasons. Tax dodging. And at the time there was probably valid reason.   

Faithful employees looked up from their desks and realised that the contractor sitting opposite them was being paid more and paying less tax. People cottoned on - I can negotiate to leave and come back as a contractor. It seemed the perfect win-win for companies and employees.   

HMRC also cottoned on. Enter the Finance Act 2000, which ushered in IR35, a means to stop companies from employing people indefinitely without having to pay the appropriate tax, and to prevent individuals from taking advantage of the tax system too.   

The bubble burst. 

But why is IR35 still so hated all these years later? Why haven’t we got used to it and why is it so despised? After all it’s here to stay. The Government has made that abundantly clear in recent Budgets with changes in the way it’s applied in the pubic sector. They act as a warning to the private sector. No-one should rest on their laurels.   

In principle you can’t argue with the notion that becoming a contractor to avoid paying tax isn’t very noble. It’s easy to see why the Government wants to clamp down on abuse. For many, occasionally working inside IR35 will be a necessary evil, but it’s worth it for the perks. 

At that’s what is puzzling. We seem to be fixated on knocking IR35 entirely, rather than focusing on pragmatic and fair application, and reaping the benefits of being a contractor. Because when you talk to contractors, paying less tax is much lower down on the list of reasons why people turn self employed than you’d think; being at the school gate, sports day and the Christmas play, having time for an elderly relative, to train for marathons, or do that art diploma you always promised yourself you’d do, finding more challenging and rewarding work that’s not offered to a permanent employee, traveling the world. They are the reasons why people do it. It’s about lifestyle. It’s about working to live, not living to work.   

People work for different reasons today and they have more choice about how, when and where they work. Employers actively encourage flexibility and they look for suppliers who can keep their business agile too.   

Put another way, if a contractor, in lining up their next contract, finds the perfect role – a good rate, an interesting project and a supportive environment with flexibility on hours - would they dismiss it in an instance because the contract is inside IR35? Unlikely. A contract’s IR35 status is increasingly likely to become another trade-off in considering the appeal of a new role. 

Many have also said that if the off-payroll made to the public sector are applied to the private sector, the contracting world will stop.   

Truth of the matter is the contractor market hasn’t seized up in the public sector and it’s highly unlikely to come to a grinding halt in the private sector. Yes, there were some humps in the road when off-payroll working rules were applied in the public sector. This, however, was not a reflection of legislation, but a reflection of risk-averse and stretched public sector procurement teams. The free-market forces of the private sector, the desire for a competitive edge, and a different appetite to risk will ensure a steady stream of contract opportunities both inside and outside IR35. 

That’s because businesses that want to scale and grow need expertise, but they often don’t need it forever. Specialist contractors are a boon for getting new projects up and running with an accelerated time to market. The demand for contractors won’t go away and the Government knows it.   

Actually the really hard bit in the debate is managing IR35 properly. Lots of contractors up and down the country in all fields, not just IT, say paying tax is a given, and they want to abide by the law and pay the right amount. With pensions as they are, they know it’s vital to pay in if they want a pay out.  

How taxation and take-home pay is structured, and how expenses are treated depending on your IR35 status can be the difficult bit to wrap your head around.   

That’s the rub, as a contractor you’re on your own. You have to work out where you stand. If you find yourself inside IR35 then naturally allowances, tax bills, and the means to calculate it change. It’s part and parcel of working in Britain today.   

So isn’t it time to get on with IR35, see it as an occasional means to an end? It can be managed and balanced with all the perks of working for yourself. The cons far outweigh the pros. And let’s face it, when people do make the plunge they often wonder why they never did it before. Work life balance is a hard to achieve and contractors are the tribe that enjoy it with great confidence.  

James Poyser, CEO, inniAccounts (opens in new tab) 

Image Credit: SFIO CRACHO / Shutterstock

James Poyser is CEO of inniAccounts, an online accountancy for self-employed professionals. James founded the company with his brother 10 years ago when they realised there was no accurate way to manage their finances and calculate their tax bill accurately. He now helps thousands of contractors and consultants manage their accounts and tax in real-time online, for which the company boasts a Queen’s Award for Innovation.