Contractors who revoke inside IR35 status ‘won’t get Employer NI back’

Plus, why ‘how much you pay HMRC in employment taxes doesn’t hugely differ from what you’ll pay outside IR35.’

Contractors who choose ‘outside IR35’ once their mid-sized client who deemed them ‘inside IR35’ turns “small,” risk take-home pay blues.

In fact, “very little tax advantage” awaits PSCs who go from ‘Chapter 10’ to ‘Chapter 8’ rules, but then place themselves outside the latter’s scope.

Ahead of UK company size thresholds changing, David Kirk & Co issued this guidance-based alert yesterday, exclusively to Kingsbridge.

‘Revoke your IR35 status and ER NI returns to agency/client’

Addressing PSC contractors, the chartered tax advisory which specialises in employment status told the leading IR35 insurance firm:

“End-clients will have issued Status Determination Statements to inside IR35 PSCs, so they know that their tax is dealt with under PAYE.

“Where a medium-sized client is set to be ‘small’ due to the company threshold changes [and so will no longer be responsible for the IR35 assessment, because it’ll revert to the contractor], it must withdraw its SDSs before its size classification changes.

“But inside IR35’s major burden – Employer’s National Insurance – is borne by client or agency, and if you overturn your status, they get the ER NI back, not you.

“Also, what you pay in PAYE and NI won’t hugely differ from outside IR35 [where CT and dividend tax are payable to HMRC], except on £50-£70k annual earnings.”

‘Marginal tax rates inside IR35 and outside IR35 at basic and higher bands’

Pressed about such PSCs (those with big travel-to-work-expenses and residing in Scotland were identified as the other exceptions), the tax advisory’s David Kirk told Kingsbridge:

“The £50,000-£70,000 contractor…[is well-positioned] because of the interaction of CT [corporation tax] with income tax.

“Specifically, if you earn £50,270-£75,879 as a PSC contractor, your marginal rate inside IR35 will be 42%, whereas outside IR35 it will only be 31.5%.

“This is because, at that level, you [the PSC contractor] will only be paying basic rate tax on the dividends.

“However, if you’re a PSC inside IR35 at the higher rate band, you’ll pay HMRC a 42% marginal rate of tax; 40% income tax and 2% NI.

“Whereas someone outside IR35 will pay 50.3%; 25% CT plus 33.75% on the leftover 75% which works out at 25.3%.”

‘Smaller final net retention figure between inside IR35 and outside IR35’

Exclusively for Kingsbridge, Workwell Solutions arrived at similar calculations, also largely as a result of gradual changes in UK tax rates.

“The difference in final net retention between inside IR35 and outside IR35 is – in many scenarios – now smaller than it’s been before.

“So the general perception of outside IR35’s value,” continued Workwell manager Stuart Marquis, “hasn’t quite caught up with the new reality yet.”

‘Outside IR35 benefits have diminished’

Kingsbridge IR35 project manager Ryan Dawson points out that outside IR35 roles aren’t only seen as appealing due to their take-home pay.

But solely on the financial front, Dawson acknowledges that the “benefits of outside IR35 have slowly diminished with changes to tax rates”.

On April 6th 2023, corporation tax increased to 25% for PSCs with £250k+ profits, says JMK Group’s Zeeshan Anwar, who told Kingsbridge:

“While CT stayed at 19% on sub-£50k profits, with marginal relief on turnover between these sums, [the increase] hiked outside IR35’s tax bill.

“On the other hand, inside IR35 is subject to full PAYE taxation, including ER NI – rising to 15% from April – reducing overall earnings.”

‘Little point in accepting inside IR35 gigs unless at a very high rate’

Anwar says that except for an extremely high rate on an inside IR35 contract, PSCs would likely see “little point” in taking it.

“Overheads incurred by the hirer, such as ER NI and possibly the Apprenticeship Levy, would be deducted from the contract rate.

“And that’s before the contractor’s taxable pay is even calculated, subject to full employment deductions,” he said, adding:

“Add in the obligations that the limited company director has…plus the costs of running the company…and it hardly makes inside IR35 contracting worthwhile.”

‘Stop calling it ‘inside IR35’’

So to JMK’s new compliance director, while outside IR35 isn’t what it once was, it at least has “certain tax benefits” over inside IR35.

Not that ‘inside IR35’ is worth the paper it’s printed on any longer.

“We should probably stop referring to things as ‘inside IR35,’” a veteran of IT contracting, Alan Watts began last night to Kingsbridge.

“Most ‘inside IR35’ PSCs are only there because the clients are ignoring IR35, rather than trying to deal with it, refusing to deal with PSCs at any level.”

‘Inside IR35 nowadays means non-limited company’

Contractor Ken Davis echoed this week to his online followers (clearly hoping end-users and agencies in his network were paying attention):

“The contractor marketplace has changed.

“Blanket bans make IR35 irrelevant; the role is no longer ‘inside’ or ‘outside.’

“You are an employee of an umbrella and so IR35 doesn’t apply. So stop saying it’s ‘inside IR35’ when it’s not, it’s just non-limited company.”

‘No benefit putting inside IR35 work through a limited company’

An adviser was last week attacked on social media for saying workers could use PSCs inside IR35 – but they “just won’t be *as* tax-efficient.”

“Er, no, they won’t be efficient at all,” responded Mr Watts, a former services management consultant.

“Any monies paid in will be net of tax and therefore should be paid straight back to the worker in full.

“However, it will show as a profit on the limited company’s ‘Profit & Loss’ and so [is] liable to corporation tax.

“And that’s tricky since the company has effectively no income to pay it from, or to pay the assorted small bills…that the limited company is still accruing.

“So [with] inside IR35…there is no point in filtering it through a limited company.”

‘Unable to claim tax relief if inside IR35’

The absence of expenses is another reason inside IR35 is disliked so much, suggests Workwell’s Mr Marquis.

“Inside IR35 contractors are unable to claim tax relief on everyday expenses like travel, mileage, accommodation and meals,” he says.

“In practice, this greatly restricts such contractors’ mobility and discourages them from working in different parts of the country to where they live.”

‘Inside IR35 indicates organisations don’t know how to deliver projects’

The Talent Collection, which sources skills for firms across the UK, says it refuses to facilitate inside IR35 roles.

“[We] would just like to officially confirm that, for contract roles, [we] will not work with any businesses that make ‘inside IR35’ determinations,” wrote the recruitment platform.

“[Inside IR35] indicates that an organisation doesn’t know how to deliver projects, programmes or transformation properly.

“And [it indicates] they don’t understand how to engage the best external expertise for specific work.

“But, most importantly, it means we can’t place the outstanding network of interim talent built up over years; who will, rightly so, only contract on an outside IR35 basis.”

The Talent Collection’s boss Dan Pasqua reinforced: “Every one of our clients determines contract roles outside IR35 – in the areas we support. And that’s how it will remain.”

‘Challenging IR35 status at an early stage has potential’

Asked yesterday about ‘outside IR35,’ Workwell said value remains in replacing it with ‘inside IR35’ before work begins.

“We’re referring here to a PSC overturning ‘inside’ for ‘outside’ before the engagement commences and before payments are made,” began Workwell’s Mr Marquis.

“Challenging at this early stage, rather than later on – resulting in unpicking payments and associated tax deductions already made, has potential.

“It opens up a scenario where the rate received by the PSC for the assignment can be adjusted in the contractor’s favour.

“That could advantage the PSC in a way that returning employer’s National Insurance to the agency or client [where the PSC overturns their inside IR35 status having decided themselves to be outside IR35 at a small company that was medium-sized], would not.”

‘One size doesn’t fit all with limited company contracting’

JMK Group’s Mr Anwar hinted that it’s all thanks to the advantages of being a bonafide business that engages on B2B terms.

“Outside IR35 contractors can make use of a low salary which will then be taxed at the basic tax rate.

“And then any dividends paid will be taxed at their respective tax rates.

“Of course, one size doesn’t fit all with limited company contracting,” he acknowledged, adding:

“But depending on the financial plans of an outside contractor, they can use the most tax-efficient method to extract the money from their limited company which will generally attract less tax than an inside IR35 contractor.”

“So despite the increased taxation for outside IR35 contractors….it’s not enough of a reason to completely ignore limited company contracting, as it remains a viable way of working.”

‘HMRC liabilities aren’t the be-all and end-all’

Kingsbridge’s Mr Dawson says outside IR35 might be one way of working that is getting more taxing, but he believes its appeal is far from singular.

“Yes, take-home pay is historically a key consideration when contractors come to assess a contract.

“But how much will be owed to HMRC is nowadays not always the be all and end all of limited company contractors who we support with IR35 insurance.”

‘Part and parcel’

The insurer’s IR35 project manager explained: “Some truly do value being their own boss. Others value having flexibility over their workloads or projects, and many like engaging various customers with limited liability on a genuinely self-employed basis.

“Part and parcel of that means having the opportunity to grow and expand their operation if they wish, or just control it. So ultimately, and quite at odds with their inside IR35 counterparts, outside IR35 limited company workers can be tax-efficient in the long term, especially as their businesses grow and their profits increase.”

How Kingsbridge can help

Navigating IR35 legislation and ensuring compliance can be challenging for contractors and businesses alike. Kingsbridge offers tailored support, including expert guidance on IR35 status assessments, compliance strategies, and risk mitigation. Our team is dedicated to helping contractors and businesses understand and adapt to the evolving tax landscape.

Kingsbridge also offers a range of flexible business insurance options to support contractors, including Professional Indemnity, Public Liability, and Employers’ Liability cover, as well as add-ons like Cyber Insurance and Director and Officer’s Liability.

To find out more, get a quote or contact us today.