Working inside and outside IR35 – what are your options?

With several years now having passed since the private sector off-payroll (IR35) reforms were implemented, we can now see more clearly the impact on contractors and how they are working both inside and outside IR35 through a dual solution.

There can be no doubt that the reforms, which were implemented in the private sector from April 2021 onwards, have led many individuals and companies to rethink their hiring strategies and policies.

We’ve seen a lasting impact of IR35 on the contracting industry, which has led to changes in how contractors work and ongoing confusion for some about what the rules mean for them.

Here, Clarke Bowles, Director of Strategic Sales at Parasol Group, highlights how to know whether you should be working inside or outside of IR35, and why many contractors are keeping their options open and choosing to do both.

What are the IR35 reforms?

Introduced to curb potential tax avoidance, IR35 is intended to differentiate between permanent or PAYE employees working for the same organisation day-in-day-out, and genuine contractors working on a range of different assignments, often covering one-off pieces of work.

The IR35 legislation is now more than 20 years old. It extends to all workers working through an intermediary and applies if a contractor works for an end client via an intermediary, who would otherwise be an employee or office holder of the end client if it weren’t for the third party involvement.

The reforms largely shift the liabilities and responsibilities, meaning that medium and large-sized private sector businesses hiring personal service company (PSCs) contractors are now responsible for determining the IR35 status of each assignment.

Contractors who are genuinely in business on their own account and receive an accurate and fair assessment can continue to work outside of IR35.

---

---

To be inside IR35 means the working relationship is effectively one of disguised or ‘deemed employment’ and the contractor must pay employment duties of tax and National Insurance on their income.

Determining whether you’re inside or outside of IR35

Following the reforms, it’s now up to the end hirer (in most contractor cases, the client) to declare whether they view the assignment as being inside or outside of IR35. This requires looking at the written contracts between the parties and, crucially, the actual working practices.

When considering IR35 status, it is important to establish a hypothetical contract that reflects the true nature of the relationship between the worker and the end client.

To support end hirers in determining a contractor’s IR35 status, the government recommends using the CEST tool. This has been criticised, with some cases showing that relying on it alone can lead to incorrect determinations. If in doubt, it’s advisable to speak to a qualified professional on IR35 compliance.

Once the IR35 status decision is made, it should be detailed in a Status Determination Statement (SDS) – a document for all within the supply chain, that is supplied by the end hirer. The client must take reasonable care when making this decision.

Secure an SDS and raise any queries quickly

In line with the rules, the SDS should be provided to the contractor and the first party in the supply chain.

There is no requirement for this to be signed, but the end hirer should retain proof that it has been provided to both parties, ensuring transparency and allowing the fee-payer to verify that the correct taxes are paid.

The SDS sets out the reasoning behind the determination. Once it has been issued, responsibility for applying the correct tax treatment passes through the supply chain.

In addition, the SDS allows the contractor to understand the basis of the determination, which will help if they need to initiate the client-led disagreement process.

My advice to contractors in any doubt is that they need to quickly address any queries with their end hirers and, in my opinion, the SDS should always be completed.

Working inside and outside of IR35

An IR35 determination is based on individual assignments, and so contractors won’t necessarily have to work exclusively outside of IR35 or within it. Determining IR35 status is assignment-based, so while a contractor is working on one contract inside the rules, they could be working on another contract outside IR35.

Consequently, we’re seeing many within the industry shift to a combination of limited company business and umbrella employment.

There are benefits in this for businesses and contractors alike. For businesses, the end-hirer won’t be at risk of getting IR35 wrong, and for contractors, it offers a more straightforward route into organisations where IR35 policies are stricter.

The potential to work inside and outside IR35 means that dual solutions provide flexibility. Contractors can continue to work through their own limited companies when performing an outside IR35 assignment, but still have the option to move to umbrella employment if required.

The security and benefits that come with umbrella employment have also been a draw for many, but those from a limited company background often value keeping their business open.

This is particularly relevant for contractors working on multiple assignments with different IR35 outcomes.

The flexibility of a dual solution is something that has helped many contractors navigate the rules without needing to close their limited company.

Always check for compliant umbrellas

The demand for umbrella employment has increased, but with this comes the presence of tax avoidance schemes disguised as umbrella employers.

These arrangements may appear attractive but can leave contractors with unexpected tax liabilities.

When looking for an umbrella company, the first step should be to check their legitimacy with associations such as the FCSA or Professional Passport. This can provide some assurance that they have been independently reviewed.

You should also be aware of risks such as mini umbrella company fraud.

Often, recruitment agencies will have approved supplier lists in place. While this may limit choice, it is a sensible way to reduce risk.

IR35 remains a key part of contracting

IR35 continues to shape how contractors and clients engage.

While there is still some uncertainty in parts of the market, many contractors have adapted their working style and continue to operate successfully by remaining flexible and understanding how the rules apply to each assignment.