Probably Inside IR35 - what to do.

[Myneighboursdomyheadin]

Hello Mumsnet.
I have been earning really well for the past few years through my limited company but the reality is that one client has gone from being a half to 3/4 to 90% of my income and soon it will be 95% because Brexit has made my work but other clients hard to administer. I can’t send a substitute and I basically manage a team. There’s little chance I’ll be outside IR35

I’ve asked whether employment is an option as I’m very much part of the team, and they can say no if they wish.

If it is a no, am I right in thinking I may as well get rid of the limited company, pay the NI contributions and just max out my pension contributions to be tax efficient?

Hi OP,
I was in a similar situation late last year. I took on a bigger project with the client and was managing a team. Invariably the role meant I was at risk of being within IR35. I planned to end the contract but the client offered me employment. I negotiated hard to reduce the drop in income and got a reasonable offer. I also didn't want to be out of contract in a recession.
I've wound down my Ltd as I didn't want the hassle of keeping it on.

Thanks Agile that’s very helpful.
If they say no I guess I have to be philosophical.

The other option if they are worried about employment rights etc is to still be a subbie but be paid PAYE through an agency. This does mean the agency get a % for doing very little and probably a big pay cut for you, it depends how much you need to stay at this company.

I fattened up the pension contribs to the max. Paying them by the company means you save NI so is a better deal than paying out of your taxed income and getting the rebate.

You might be able to use an umbrella company, but rules may have changed. Your accountant should know.

IR35 was enforced for public sector contractors about three years ago. The HMRC online CEST online tool has to be used by the client to determine whether a role is inside IR35. Each party receives a statement of the assessment outcome to confirm the contract status.
Pre-IR35 I used to be paid direct to my limited company by my agency and my accountant sorted the PAYE as part of accounting for my company. Now my agency pays my company via a payroll bureau ('deemed direct payment') and they deduct income tax, NI, apprenticeship levy (ridiculous) and a processing fee. For the first year the bureau struggled to deduct the correct tax and I ended up with a massive self assessment bill.
Some agencies prefer me to be paid through an
Umbrella company - same deductions but the net funds are paid direct to me as their employee.
I prefer to carry on using my company so that it's still available for when I get an outside IR35 role but it does mean I still have the additional expense of administering it as well.
IR35 also means that most of my work-related expenses (travel, accommodation etc) now have to be funded from my net pay rather than through my company.
I definitely ended up with much lower net income initially compared to previously but day rates in my sector have generally been rising as a consequence over time.

Thanks for the replies, they are going to offer me employment. I think I'm ready for it, I'm pretty committed to this company.

So! next question, how do you calculate the value of £xxx gross that they paid you (before VAT) and turn that into salary!!!???!!

I use day rate x chargeable days per annum. ie. 365 days less weekends and bank holidays less an allowance for the days I take as unpaid holiday. Equates to the sum I'd receive from the client. I then decide whether I'd expect a sum on top for not being able to claim work-related out of pocket expenses.

Sounds like you are already caught by the scope of IR35 and your limited company should already be applying the legislation when preparing its self assessment corporation tax return. Not doing so is tax evasion.

The rules for off payroll working because IR35 is not being complied with.

IR35 is 20 years old, it is not new legislation.

Your accountant should be able to help you with calculating an effective gross rate, although bear in mind that you will also have the benefits of employment (pension contributions, sick pay, holidays etc) that your current rate will be inflated to cover.

Hi chasing, no it’s been building up for a while but everything accelerated this year really. I’ve transferred 5 clients over and stopped working for others, basically leaving this one as of April.

......but I guess it would make sense to take pension contributions just in case!

@cortex10

I use day rate x chargeable days per annum. ie. 365 days less weekends and bank holidays less an allowance for the days I take as unpaid holiday. Equates to the sum I'd receive from the client. I then decide whether I'd expect a sum on top for not being able to claim work-related out of pocket expenses.

That’s very good of the employer to cover that - we’d be waving goodbye to all our contractors and wishing them good luck if they expected to maintain their day rate equivalent on a full time salary - they’d have over priced themselves by quite a bit - they get paid a lot because they are highly skilled and we use them when we need them - no risk to us...full time permanent member of staff - whole different ball game!

So! next question, how do you calculate the value of £xxx gross that they paid you (before VAT) and turn that into salary!!!???

There's not really a formula, it depends on so many variables and the industry. I expect to bill 220 days a year, a full time salary for the same position would be a third of that total.

No frizz can you say a bit more about different ball game?

Our work is project based - we bring on resources to augment our team - contractors get work when we have too - so we are always busy. We don’t make a huge amount of money from contractors - so if they wished to work with us permanently, they’d have to take a massive pay cut - no incentive for us otherwise.

Agree with frizz - it’s a lot more expensive for your company to employ you than to pay you your day rate. They have to pay 13,8% national insurance, pension contributions, holiday/sick/maternity/paternity pay, plus you get employee protections like notice periods and redundancy.
So expect the number they offer to be a LOT lower - but realise the value of what you are getting in job security etc.
Whatever you do, don’t let them put you on payroll but with a freelancer contract. That’s the worst of all worlds as you get all the cost of being and employee and none of the benefit.

Ps part of my job used to be putting people on payroll if caught by IR35.

Thanks.
They do a base salary then % of chargeable hours on top.
So proper employment.
I’d rather have the flex in salary than artificial targets.

@Myneighboursdomyheadin

Thanks. They do a base salary then % of chargeable hours on top. So proper employment. I’d rather have the flex in salary than artificial targets.

What do you mean by flex in salary versus artificial targets?

They have to pay 13,8% national insurance, pension contributions, holiday/sick/maternity/paternity pay, plus you get employee protections like notice periods and redundancy. Medical insurance, personal/career development - training courses, study leave, coaching/mentoring, line management time, computer equipment, office space - we expect them to not need it. They need to come to us as the complete package - just like we'd expect not to have to do these things for a plumber we would hire. Hence they are contractors.

The rate we would pay them if they became permanent would also reflect their versatility, their range of skills - they may excel at one area we pull them in for a 6 month project - but to be a permanent employee you need to have a wider high level skill base to be useful year round. So they may be more limited in terms of their usefulness to us than they imagine they are...that's often not an easy thing to hear when you get used to being paid a high day rate.

The other option is be inside IR35 but up your rate to reflect that, the tricky thing is from going outside to inside with the same client, even going outside to perm puts you at risk of losing against HMRC that you would never really outside to begin with - so ahem they could make you pay back taxes if they ever investigate.

The sensible solution might well be to find a new job, either as a perm or as a contractor whether that's inside or outide IR35.

When I used to calculate contract to perm we used daily rate x 220 days then x .6

I appreciate this will be less than you'd likely want.

We would move a bit above that, but in general that's what the business felt was fair market value.

I hope you get a salary that works for you

@Esse321

The other option is be inside IR35 but up your rate to reflect that, the tricky thing is from going outside to inside with the same client, even going outside to perm puts you at risk of losing against HMRC that you would never really outside to begin with - so ahem they could make you pay back taxes if they ever investigate.

The sensible solution might well be to find a new job, either as a perm or as a contractor whether that's inside or outide IR35.

Hmrc have unofficially confirmed that they won’t look to collect back taxes from people trying to sort themselves out for ir35

Hi Frizz,

Last time I was an employee I had a healthy “normal” salary plus high billing expectations. I couldn’t meet the billing expectations because there wasn’t enough work to go round. It was awful - I promised myself I would never be in that situation again.

With “new” employer it would be base salary plus 50% of whatever you bill. So if there is a downturn I might earn less but am less likely to be told I’m failing.....

Fudge that’s reassuring thanks

@Myneighboursdomyheadin

Hi Frizz,

Last time I was an employee I had a healthy “normal” salary plus high billing expectations. I couldn’t meet the billing expectations because there wasn’t enough work to go round. It was awful - I promised myself I would never be in that situation again.

With “new” employer it would be base salary plus 50% of whatever you bill. So if there is a downturn I might earn less but am less likely to be told I’m failing.....

Have seen that happen for sure, the culture of unrealistic targets. There are some very brutal incentive packages where only the best in the team gets the big juicy bonus or the "up or out" - you either get promoted or sacked - it's not the way we work, it creates poor team dynamics and dysfunctional behaviour - often at the client's expense.