What’s the cost of IR35 changes for you? It could be your house, a holiday or even your child’s education

Cost of IR35 ChangesI have been talking and writing about IR35 changes for a while now, but there is no longer any time left for being gentle with this story: The fact is that it is about to become a nightmare! Yes, you will have heard of IR35 and someone, perhaps your accountant, has told you that your contract is deemed to be outside of IR35. And it may well be that it is … But whilst the rules are unchanged, if you are contracting in the public sector the end user of your services will now determine the IR35 status of your contract.

For most there will be no escape (sorry to be the bearer of terrible news)! If your contract is deemed by the end user to be inside this dastardly HMRC net (and most public sector contracts are likely to be viewed this way) it will cost you a lot of money. Let’s say your current contract is worth £100k per year and your contract is now deemed inside IR35, wave goodbye to £14k per year.

What impact will that have on you and your family’s lifestyle?

Things are changing and will cost public sector contractors ££££

HMRC’s plans have been widely published and discussed. You have been warned – but now it is happening. The official date for when these, at best unfair – at worst bullying, new rules come into play is 6th April 2017. However, there is even more bad news. The small print dictates that the rules apply to the date of the money being paid not the date the invoice was sent or the work was done. That means the last invoice you sent, if it is not paid before April, could get caught – and it is no small penalty either.

(For the time being the current IR35 rules will continue to apply to private sector contracts. But that doesn’t mean you shouldn’t get a specialist contractor’s accountant to review your status. Remember IR35 is assessed on a contract by contract basis – not by your status as a contractor.)

How long will the pain last?

The consequences are far reaching. In reality many public sector contractors will have to abandon their contracts in favour of private sector work – the negative financial impact of these changes is simply not sustainable for most contractors. However, with the anticipated flood of talent into the private sector high value contracts are going to be harder to secure.

There are three things you need to focus your energy on:

  1. Getting your personal and business finances in order – know where you are now so you can plan to move forward.
  2. Gain the knowledge you need to fight your case – you may not win, but with the potential losses involved surely it is worth the investment of your time to try?
  3. Get out into the market place to secure your next contract now. This is crucial and no contractor can afford to wait, even those in the private sector.

Getting your finances in order

The one question you need to answer right now is ‘when will my money run out’ – yes, it is that serious. If you need to call on cash reserves in your Personal Service Company (PSC) to bridge the financial gap, knowing when your reserves will be depleted is essential.

If you are not sure how to go about this call me today. My team and I help contractors run their finances through FreeAgent which displays this information and so much more to give them complete visibility and control of their finances.

Once you know when the cash will run out you need to make some changes. For some, this could simply be planning how much they need to earn on their next contract to rebuild their cash reserves. For most, however, this means changes to their lifestyle. If the cash will run out in 2 months you need to find a new contract immediately or face significant sacrifices to adjust to your new level of income.

Fighting your case – is there a way out of the trap?

Quite frankly, if your contract is deemed to be caught, there is little chance of escape. However, there is a glimmer of hope. Understanding the rules of IR35, having your contract professionally reviewed and trying the new HMRC tool for yourself will give you the knowledge you need to fight your case.

Securing your future

This advice is equally applicable to contractors in the private sector as well as those facing the changes in the public sector.  If there is, as I anticipate, a significant move from public to private sector contracting, the rules of supply and demand will win. In the private sector contracts will be harder to secure and likely rates will drop – so get out there now and find your next contract!

In the public sector we could see short-term increases to contract values to make them suitably attractive, but it is simply not sustainable over the long-term. The reality is more likely to be a skills shortage and public services will suffer.

What to do right now

This is what I would do if I had a public sector contract:

  • Get a comprehensive, professionally written IR35 review conducted by IPSE or a specialist accountant.
  • Keep a copy of my contract, highlighting the relevant sections that put me outside of IR35, and stating ‘why’ I should still be outside (referencing my professional review).
  • I would also use the HMRC tool myself to get an understanding of how of each of my contracts will be assessed. This will also give an indication of the areas where I might be able to fight my case.
  • Use FreeAgent for my accounts: it is the only cloud accounting solution with an IR35 Calculator that will tell me exactly how much I would earn ‘in or out’ of IR35.
  • FreeAgent will also tell me how much money is mine, in real time, so I can plan my expenditure.
  • Importantly  FreeAgent would give me a clear view of my company’s cash reserves, telling me how much I can spend and how long I can survive with a reduced income.
  • Look for a new contract – competition is only going to rise so acting early is the best course of action.

Please don’t take this post as defeatist, I am just pointing out the fact that this fight is one where HMRC seem to be holding all the cards and have got contractors in the public sector cornered. The unlucky, the misinformed and the ignorant will have to pay up this time. I’m not saying contracting is no longer worthwhile, just that you need to take the right measures to protect your income, lifestyle and rewards – and you need to do it now! If you need some help please get in touch.