Navigating IR35 in 2022 - for contractors and independent consultants

Facing the dual impacts of the pandemic and the introduction of IR35, 2021 was a challenging year for many contractors and freelance consultants. As they embark on the new tax year, Kris Simpson, Country Manager at Cool Company, outlines what IR35 has in store for the UK’s contract workforce in 2022.

Originally put forward in 1999, the idea behind IR35 was to stop workers who were effectively employees but working via their own limited company and reducing the amount of tax they pay on their income.

While the basic premise remains the same, in April 2021 the remit was extended to include Off-Payroll Working Rules (OPWR). Already put in place for public sector workers in 2017, this has been extended to the private sector.

Contactors paid by a business that qualifies and a medium or large company need to follow OPWR. This change is impacting a huge number of contract workers.

The rules apply to medium and large sized businesses that meet at least two of the following benchmarks:

• Turnover of greater than £10.2 million
• A balance sheet with a value of £5.1+ million
• 50+ employees

Any of these companies working with contractors now have to decide whether any of those contractors could actually be classed as an employee. And to manage their tax and national insurance liabilities accordingly. At the same time as ensuring that their rights as an employee – insurance, holiday pay, sick pay, and all the rest – are honoured.

And as many contractors will already know, in 2021 this meant that masses of businesses abandoned their contract workers. So, how are contractors managing this change in 2022?

What can contract workers do to ensure that they stay on the right side of IR35?

The most important issue for contractors is to be sure of their status. If your clients do not fit into the OPWR criteria, you don’t need to worry. Right now, the rules don’t apply to you.

But if you are working with the bigger brands, you need to ascertain whether you really are self-employed, or if your terms could reasonably be viewed as employment. So ask yourself:

• Do you provide your own equipment, or is it provided by the business?
• Are you working with a range of clients, or just a single employer?
• Who decides when and where you work? Can you refuse work that doesn’t fit within the terms of your original contract?
• How long is your contract?
• Do you receive any employee benefits?
• Do you have the right to terminate your contract?
• Is there any degree of financial risk to your work? Does payment depend on your work being completed to a requisite standard? Or are you simply paid the same fee regardless of the work you produce?

If your answers to these questions indicate a more ingrained and permanent relationship with the business you work for, there is every chance that you may be considered an employee by HMRC.

What are the options for contract workers post-IR35 reform?

If you’ve decided to stick it out and find an IR35 workaround, there are two main paths that are typically being pursued.

Exploring new territories
While IR35 has thrown a number of obstacles under the wheels of contract workers, for some it has created the impetus they needed to spread their wings. IR35 does not stretch to cover overseas employers. And for those with skills that can travel, there is literally a whole world of opportunity waiting.

It’s a route that can be quite difficult to travel alone – finding contacts and opportunities can be time-consuming. But with agencies, umbrella companies, and contract marketplaces smoothing the way, it’s an avenue well worth exploring.

Stepping under the umbrella
For thousands of contract workers and businesses, umbrella companies have provided a pain-free solution to IR35. Working as an intermediary between businesses and contract talent, they take care of the red tape that IR35 has unspooled. Managing contracts, payments, and compliance, allowing contractors and their clients to return to their old, familiar way of working.

And with many businesses still at a loss on how to manage IR35 compliance in-house, it seems unlikely that this scenario is going to change. But it does raise one other problem…

Dodging the dodgy umbrella companies
Until quite recently, umbrella companies had a bad name. And that name was often well-earned. But most umbrella companies now adhere to high ethical standards. They want to remain in business, so they take steps to ensure that they are compliant in every way. Using HMRC-compliant software to manage employment and payroll and doing their best to further the interests of everyone they work with.

However, there still are some quick-buck-seekers out there. And perhaps more than ever before, it’s really important for both businesses and contractors to find compliant PAYE umbrella companies to work with.

Further reading: Options for freelancers hit by off-payroll and IR35 reforms.

IR35 has put new pressures on contract workers. And it has arguably made life more difficult for the businesses that rely on their services. But it is not, by any means, the end of the contract and freelance industry.

Last year was hard, primarily because businesses were frightened of the new legislation. They lacked confidence in their ability to navigate compliance, so the knee-jerk reaction was to put an end to outsourcing. Now, there are new ways forward. Providing contractors with a brighter, if slightly different, future.