What does IR35 mean for Contractors?
IR35 has been around since April 2000 and was introduced to ensure contractors working through intermediaries and behaving like disguised employees were taxed like employees.
From 2000 to 2017 the individual contractor had responsibility for the status determination statement (SDS) for any roles in both the public and private sector.
In April 2017 the rules changed and the responsibility for the SDS shifted to the public sector hiring organisation. This now meant that a lot of contractors found themselves inside IR35, so they left the public sector and found new roles in the private sector.
This shift in responsibility was due to be rolled out to the private sector in April 2020 but, due to the impact of COVID-19, the legislation was deferred to April 2021.
So, from 6th April 2021, the end client in both the public and private sector will bear the responsibility to determine if a contractor is working ‘inside’ or ‘outside’ of IR35.
This fundamental shift in responsibility has also shifted the risk, now end clients must comply with the legislation and be ready to prove it if HRMC investigate.
What does it mean to be IR35 compliant?
This section applies to both the contractor and the client.
Due process & reasonable care
The process must show that:
- An assessment has been made
- A Status Determination Statement (SDS) has been created and shared with the contractor
- An appeal process is in place
Pre April 2021 the Contractor must conduct the SDS, after April 2021 it is the responsibility of the end client.
Who does IR35 apply to?
The legislation from April 2000 applies to all intermediaries behaving like disguised employees.
The responsibility for determination sits with the individual contractor until April 2021, but the requirements for assessing and evidencing are the same for both the contractor and end the client. However, the client is likely to take a more risk averse approach.
Organisations that are classed as small companies (as per the UK ‘s Companies Act 2006) are excluded from the IR35 legislation.
Contractors who provide services to organisations that meet 2 of the following 3 criteria will be able to secure a contract that is outside of IR35.
- Income of £10.2m or less
- £5.1m or less on its balance sheet
- 50 employees or less
Will IR35 impact my earnings?
Absolutely… but how depends on you & your approach to running your business!
You can continue to charge your current rates (or maybe increase them) if you provide a specialist service, are in demand and use niche agencies.
Your rate is likely to be negatively impacted if you provide a generic service that a lot of other contractors also provide and you only use the more transactional recruitment agencies.
Can I still run a Limited company if my contract is inside IR35?
That depends on your client & your agency.
Some clients have declared that they will not engage with ‘Personal Service Companies’ (PSC’s) or even allow their 3rd parties to provide contractors via PSC’s.
Some clients have insisted they will only engage via an Umbrella company – but the umbrella may allow PSC’s.
Some agencies will not work with PSC’s and insist on the contractor using the agents own umbrella subsidiary.
Some agencies will work with PSC’s and the contractors chosen umbrella.
As you can see, the more control you give to the client & agency the bigger the impact of IR35.
How do you become a Contractor?
Make the decision & take the leap
Most people decide to become a contractor after they’ve been made redundant or taken early retirement – the financial buffer gives them the security they need to set up their own business.
If you don’t have a buffer (typically 3-6 months to cover your personal cashflow) you can start the ball rolling whilst you’re in a permanent role. Get your company & bank accounts set up & start talking to recruitment agents.
Just remember, most clients will not wait longer than a few weeks for contractors so any notice period for your employer could limit your entry into the market.
Business Structure – Limited Company or Umbrella?
If you choose to set up a Limited Company then you will become a Director and take on the responsibility of running the company as well as working for your company. You will also be a shareholder and can take cash out of the company by way of dividends
If you choose an Umbrella company you will become an employee of the umbrella and they will make all of the necessary Tax & NI deductions before they pay you, they will also typically charge you a fee for doing this!
Register for VAT
The current VAT threshold is £85,000 – you will only need to bill through your limited company for 8 months @£500 per day to hit this sum, so register early.
If you work under an umbrella agency you are an employee and will not need to register for VAT
You can register yourself (https://www.gov.uk/government/publications/vat-application-for-registration-vat1) or your accountant can do it for you.
Choosing an Accountant
If you set up a limited company it’s wise to get an accountant, you can do it yourself but if you need to borrow funds (a mortgage or a loan) then lenders will want audited accounts and references from your accountant.
Choose your accountant carefully, they should work with you to help you grow your business & maximise your profits.
Open a business bank account
You need think about the business structure & then decide if a traditional high street bank is best for your needs (more products but maybe needs more paperwork) or if a newer online bank would suit you better (ease of use and many features but maybe fewer products)
Make sure you think about both business & personal insurances
Business – Professional Indemnity, Public Liability, Employers Liability (if you have employees) and also Tax & IR35 investigation cover
Personal – Life, Critical Illness & Jury Duty
What do you need to do to be a Contractor?
Change your mindset
Before you begin to work through ‘How do you become a Contractor’ you need to change how you think about yourself, your professional relationships and your new business.
You are no longer going to be part of another organisation, you will not have the support of a wider team and the normal support functions of HR, IT, etc
You will also need to work hard to nurture professional relationships as a business owner and not an employee. You no longer work ‘for’ anyone else, you provide services ‘to’ a client
Finally, think about all the roles you will need to play – Sales, Marketing, Business Development, Finance … there is a lot more to running your own business than you may first consider!
Network, network, network…
You need to have an ‘always on’ approach to networking – think of it as your business development activity.
In person networking can be both physical and virtual, as the saying goes …‘people buy people’ and you need to help future hiring managers and agents get to know you on a personal level
Be flexible & ready to respond
Contracts are not always going to be within commuting distance, there’s a real possibility that you will need to stay away from home for all or part of the engagement, so flexibility is key
Contractors are also expected to be available at short notice, typically they’re brought in to provide an immediate problem, and so 2-3 weeks turnaround time is expected.
How do Contractors get clients or work?
Traditional Recruitment Agents
Traditional (Transactional) recruitment agents are those that process volume, they stick to run of the mill roles & are known to ‘bodyshop’ contractors for a lot of generic roles.
Niche agents are those that specialize in a certain type of role or skillset, they tend to have better quality roles
“Job” Boards – Generic
This route should come with a general health warning as most agents will auto post their roles to all of the well known job boards, and then a lot more agents will clone the same roles in the hope of being able to source for the client and get the fee.
Old roles are also left on a number of sites long after they have been filled
“Job” Boards – Niche
There are more & more websites being set up to scrape specialized roles from the generic boards and gather CV’s from skilled contractors. Niche agents also post direct to these websites as there is a better quality of contractors engaging
Direct to the Client
Contracting direct by way of a network referral is arguably the best engagement model for both the contractor and the client.
The most typical scenario is the hiring manager (or someone they trust) knows the contactor, so the ‘interview’ is usually no more than a relaxed conversation to check each other out.
The easiest way to then bring a direct contractor into an organisation is when one of the agencies on the Preferred Supplier List (PSL) is used to ‘payroll’ the contractor for a very small percentage fee (2-3%).
This route aligns to established recruitment & HR processes
The client saves a considerable amount of cash on overall agency fees and the contractor can factor this into their negotiations
On rare occasions a contractors Limited company maybe engaged via procurement and a supplier account is created. A statement of work (SOW) is usually established and payment made according to the set deliverables contained in the SOW.
In this scenario the contractor should issue invoices and chase for payment!
Consultancy – Small niche ‘one man bands’
Typically contractors in senior positions who use their own network to fill roles on their latest programmes. They will introduce you ‘direct to the client’ and either take a finders fee from them or charge the contractor a % of their day rate
Consultancy – New Divisions of established Recruitment Agents
Consultancies have emerged whose business model proposes to mitigate the risks of IR35 compliance.
Effectively, your Limited company is engaged by the Consultancy under a Statement of Work (SOW) and the client, under another SOW, engages the Consultancy.
You should be sure you fully understand the legal & commercial engagement, the new consultancies will promote themselves as ‘small companies’ but if they’re part of a larger group of companies then IR35 rules will still apply
Consultancy – By Invite Only
Bigger recruitment agencies have had Consultancy divisions for a number of years and now only accept contractors they have invited into the group. Most of the work on offer is by tender only
Consultancy – Management Consultants (EY, Deloitte, McKinsey, etc)
The cream of the crop, they look for the best and charge you out in line with their rate card but still pay you the ‘going rate’ for contractors
Consultancy – Specialised Contractor Agents
These are agents acting for the Contractor not the Client and have typically spent a considerable amount of time actually working as a contractor.
They provide PR & marketing for the Contractor and try to match their specific requirements to a client. If this is not possible they will support the contractor with any challenges they may face, including any of the ways to find a client
How much do Contractors earn?
Income vs earnings
What you invoice a client is not necessarily what you will earn as a Director/Shareholder of your own company – although it could be!
Income will depend on your day rate and how many days in the year you have worked
Earnings will come from a salary (typically kept below the Tax & NI thresholds) and dividends. You do not need to take all of the profit out of the business in dividends so the answer to ‘how much do contractors earn?’ is actually… it depends!
Why do Contractors get paid more?
Contracts can be terminated with limited notice and there could be gaps in between clients, this financial risk sits totally with the contractor. Compensation for the risk is usually day rates that are higher than employees could command
Contractors with specialised skills will command better day rates than those with a more generic skillset. Identify where your skills fit in the market and make sure you amplify them in any rate negotiations
Supply & demand
Established rules of economics apply, when supply exceeds demand then the rates will suffer… so, Contractors don’t always get paid more!
Is it still worth being a Contractor in the UK?
Yes – there is nothing like the freedom of working for yourself. No more objective setting, no more appraisals, no more office politics. If you approach contracting in the right way – you control the business & not let it control you – then the rewards are significant and not just financial
No – if all you want to do is secure a long contract, turn up every day, sit at the same desk, get told what to do and go to the office Christmas party… then you really need to reconsider.
Contracting has changed in the UK since the changes to IR35 in the private sector were proposed. The spotlight has exposed working practices that do not support the running of an independent business & end clients will now carry the risk.
Rates are impacted if your role is deemed ‘inside IR35’ and contractors are being forced in arrangements with Umbrella companies… and are being charged for the pleasure!
What makes a successful Contractor?
- Never ‘on the bench’?
- Rates that never go down by more than 10%?
- Rates that are stable or increasing with each contract?
- Interesting & innovative projects?
- Experiencing different industries?
- Learning new skills/technology?
- A short commute?
If you answer yes to most of the above, then your levels of success will absolutely mirror how well you run your business. So, ask yourself…
- Is your business development ‘always on’?
- Do you own your sales pipeline?
- Is your brand well known and trusted?
- Are you consistent with your marketing?
- Are you keeping your skills relevant and up to date?
If you answer no to most of the above, then maybe you can see what makes an unsuccessful contractor!
How do I get contract work?
Look at your service proposition through the eyes of your customer.
- What’s the problem you solve for them?
- What’s the value you add?
- How do you provide customer satisfaction?
If you’re out of contract it will be because your proposition is not clear enough and you’re not amplifying your value enough.
You also need to plan your exit from one client and your entry into the next so you avoid spending any time ‘on the bench’
What to do in between contracts?
One of the main reasons given for being a contractor is the ability to take more time off than a permanent employee could.
But, one of the main things a contractor doesn’t do is… take time off
It is uncomfortable leaving one client and not having another one lined up, but if this happens then make best use of the time.
- Finances – get your accounts up to date & manage your cash flow
- Business development – network, network, network
- Sales – work your way through your ‘golden list’ of potential clients and get in touch with hiring managers
- Brand – establish your USP
- Marketing – amplify your profile
- R&D – learn a new skill or technology
The one thing you shouldn’t do is panic, this will lead to wrong decisions and will impact your ability to survive as a contractor
How to survive as a Contractor in 2020 & 2021?
However, there are things that you can learn from your clients, things you can do to take control, continue getting clients and survive the most turbulent period in history
- Preserve cash – cashflow management is critical in any business and yours is no exception. Take advantage of payment holidays, furlough and government backed business loans with deferred payments
- Optimise your proposition – be really clear on the service you provide and the value you add
- Nurture your contractor network – a lot of roles are found via other contractors, Programme Managers look for Project Managers who in turn look for Business Analysts
There are many ways to survive… but what you really want to do is thrive!
How do I get to work with the biggest brands?
Create your ‘golden list’ of clients and then review what they’re talking about on social media and their corporate websites.
Find employees and contractors in your network who have worked with the client and connect with them on LinkedIn
Look at their connections to see if there’s any indication of the type of projects they’re working on
Create content that makes it clear you can add value
How do I find the most exciting projects?
Once you find the project you want to work on then find employees and contractors in your network who could provide introductions.
Look at where your specialised skills could be used and raise your profile with engaging content that talks to your targeted audience.
To land this type of project you need to play the ‘long game’ – start months or even years out from when you want your engagement to start so that you have a stronger chance of being the contractor of choice
How can I increase my rates as a contractor?
With experience and specialised skills you may be able to increase your day rate by £50-£100 per day, but this will fluctuate and you’ll be at the mercy of market forces. A more sustainable approach is to move up the career stack – eg, from project manager to programme manager – but this takes time as in any career
Sometimes you can ‘double bubble’ – work with 2 or 3 clients at the same time, but this is only viable for a short period of time if you are the only service provider
The most sustainable way to raise your income is to move away from day rate contracting and start to market yourself as a consultant
How do I get to work with multiple clients?
Most contracts will not restrict the opportunity but it’s down to you as the business owner to find and structure the deliverables so that multiple clients are a viable option
If you can sub-contract the work out, and show the commercial relationship flowing through your business, this is great evidence for proving your engagement is outside of IR35
How can I become a consultant?
More interesting work?
Consultants normally get all of the above and much more, but it comes at a price. You really need to raise your game when engaging with clients and take business development seriously to protect your brand
Consultants are typically part of a larger group and will benefit from a wider network of likeminded people. They will act as your eyes and ears in the market and the background support functions will take care of the contractual and compliance issues we all face.
If you’re struggling to run your own contracting business then a move into consultancy will be tough on your own, not impossible but a big step change is needed
How can Contractors Academy help me?
We provide practical advice and support on all aspects of running your business, alongside the coaching and marketing support you will need to get your service proposition ready for your new market.
We have also established a recruitment agency that will act as one of your sales & marketing channels. We actively source clients for our Academy members and the engagement model supports all of the ‘tests’ of IR35
- Substitution – we can substitute your service with one of our other members and assure the client that the quality of the deliverable will not be impacted
- Supervision, Direction & Control – all engagements are based on set deliverables and the client will have no direct input as to how this is managed
- MOO – we support short, sharp deliverables across multiple clients. At no stage is there an expectation that the client or individual consultant has an obligation to provide more work
How much will it cost me to join the Academy?
The value of the support to elevate your business above your competitors, help you stand out and promote your brand is rare in the world of contracting
The value of unlocking the network of other tried, tested and trusted consultants is incalculable
And, the value of sourcing clients, helping you land the exciting projects and raise your overall income potential is… priceless
You get a lot more than this – access to a knowledge base that provides all of the collateral you will ever need, access to exclusive networking events and much, much more
All of this for £1,999 a year
£167 per month
£5.47 per day
Where else can you take your contracting business to the next level for less than a couple of cups of coffee a day?
Are there any other agencies for contractors?
There are a lot of coaching organisations that will support with personal development and business growth, but they do not have a recruitment agency dedicated to finding clients for members
Contractors Academy is unique in the UK contracting market. Many agencies promote they understand the challenges contractors face yet the owners/employees have never walked in our shoes
The Academy was established by Karen Frith, who is a very experienced contractor and who still provides her consulting support to many well known brands across the world.
She is passionate about supporting contractors, enabling you to thrive in many industries and grow your businesses until it supports the lifestyle you want
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