Hiring Contractors – How Companies Can Beat New IR35 Rules

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Hiring Contractors
Hiring Contractors

Hiring Contractors

The Chancellor, in his Budget, has made it more difficult for hiring contractors.

In future, it will be the hiring company that will decide a contractor’s IR35 status.

Previously it was the contractor who decided that.

They will now be known as off-payroll workers rather than as contractors.

Rolling Out Public Sector IR35 Changes to Public Sector

The Government made this change in the public sector in 2017 and will now roll it out in the private sector in April 2020.

Any company who makes a wrong assessment of a contractor’s IR35 status will get a severe financial penalty.

However, the Government made one very surprising, and unexpected caveat.

When hiring contractors, this would only apply to large businesses and medium sized businesses.

IR35 Changes Don’t Apply to Small Companies

It would not apply to small businesses.

Freelancers contracting with those small companies could retain their limited companies.

They could also decide their own IR35 statuses.

When I first saw this I thought it was mostly irrelevant.

In my career as a contractor I hardly ever (if at all) contracted to a small company.

Definition of a Small Company for IR35 Purposes

So what defines a small business?
• Its turnover must be no more than £10.2m
• Its balance sheet assets must be no more than
5.1m
• It must have no more than 50 employees

I don’t think any of my 20 odd contracts would have been for a firm that small.

It’s usually the big banks, oil companies, telecoms, utilities etc. who use contractors.

Beating Government’s IR35 Changes When Hiring Contractors

However, I wonder if companies have a way around this.

I have to say, at this point, that I am not a legal expert nor an Accountancy expert.

Often companies operate with more than one company in the Group.

These companies operate as separate companies within the group.

They produce separate financial statements which are then consolidated into the group.

Selling Software Services to Rest of Group

So, what if big companies set up a company in the group just to sell software services into the other companies in he group.

This would be a separate company.

It would fit in as a small company according to the criteria above.

Contractors would be hired by this company rather than the other big companies in the group.

Setting Up a Subsidiary When Hiring Contractors

Let’s imagine Barminster Bank.

They set up a separate company to provide software services to the bank called Barminster Software Services.

All contractors would be hired through this separate company.

They could even set up several of these companies if it looked like the turnover would be too high for one company to remain a small company.

No Legal or Accountancy Bacground

Now, I have to stress again that this is just an idea.

I do not have enough legal or Accountancy knowledge to know whether this would fly or not.

Perhaps some of our readers may be able to advise on it.

See also Theresa May to Abolish Contracting Profession.

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