Culture shock? When IR35 catapults you from limited company to on-payroll employee

Whether the chancellor nods to them at Wednesday’s Autumn Budget 2021, the government’s revised and deeply unpopular IR35 rules meant that many contractors found themselves with difficult decisions to make around the rules’ commencement in April, writes Joanne Harris, head of technical compliance and payroll at SJD Accountancy.

Some end-clients unfamiliar with IR35 took the option of refusing to work with limited company contractors completely, meaning many contractors have been forced to work ‘on-payroll,’ as employees of the end-hirer, or an umbrella company.

Tax isn’t the only potentially taxing side of transitioning

They’ve may have gone from being ‘in business on their own account’ to being an employment relationship, sometimes referred to as a ‘master-servant’ relationship. Much has been written about the tax side of this transition, but much less about the day-to-day; the practicalities, the behavioural impact on individuals.

So while working as an employee of someone else undoubtedly has a negative impact on take-home pay (if you were previously calling the shots yourself by running your own business and remunerating yourself by a tax-efficient salary and dividends), there are other considerations.

When what you decided to leave behind is back in play

As contractors are probably starting to realise, the impact of shifting from being an independent business owner to an employee, ‘deemed’ or otherwise, isn’t  necessarily straightforward. Changes to working practices are possible and could take a while to adjust to. And this adjustment will theoretically be most painful for those who are having to familiarise themselves with a way of working (employment) that they once made a conscious decision to leave behind!

Significantly, we know from our most recent contractor survey, that work-life balance, control over their financial security, and the opportunity to work flexibly were important factors in the decision of contractors to go into contracting in the first place. Perhaps more problematically for those who, because of IR35 reform, have had to transition from a contract for services to an employment contract (under which one can technically be supervised, directed or controlled), an “absence of office politics” was a key perk of freelance contracting. Flexibility, like working when you want and nobody else wants, was recognised by a chunky two-thirds of respondents as a ‘pull factor’ of contracting.

Autonomy Vs benefits

This level of autonomy that bonafide contractors using their own PSC outside IR35 enjoy, usually even means that they are not subject to the regular supervision of the end-client’s line management.

On the flip side, employment has benefits. There are statutory ones like holiday pay and sick pay, and other tangible ones too, like the support of an HR department. Believe it or not, that line manager who may have gone from someone you saw monthly to someone who you now might see weekly if not daily, is also someone who ought to be supporting you.

Currently, post-pandemic, we are seeing more employers offering flexible working arrangements. If your employer hasn’t offered such arrangements, then consider asking. Flex-time (or whatever it’s called at your particular end-user), might help you if you’re one of those contractors who got into contracting via their PSC for the flexibility, only to now find it diluted by having to transition to employment.

Change in payment mechanism, but hopefully little else

That said, working in a team is something that a lot of people really value and although it can be harder for people used to working independently to get into, the working in silos-type of contractor is a probably a candidate of the past, more than a candidate of the future. We sense that the ideal situation for many a contractor who was a PSC but is now on-site via a brolly due to the off-payroll rules is where those in the client team are aware that, despite a change in payment mechanism, the contractor is still a temporary resources and nothing more.

However, if you’re really some way into your new ‘master-servant’ relationship since it became a wider prospect for many in April, and you’re struggling, then you might have some fundamental questions to ask yourself. Remember, being adaptable is meant to be a hallmark of the contingent workforce. Should you need to make a change for the good of your mental health or wellbeing because the transition from bonafide business owner to employee has been a bumpy one, you may be better off with the ‘switch’ models now on offer from some accountancy firms. These are designed to allow candidates to move between umbrella employment for the inside IR35 assignments that are too good to turn down, and limited company working for the outside IR35 assignments. The models allow contractors to work on the projects that interest them, regardless of the IR35 status of the assignment or IR35 policy of the end-hirer.

Finally, the big picture

The big picture is that, thanks to their adaptability, most former PSC contractors now on-payroll at their client directly or via a brolly will have probably not noticed too much of a difference, especially where the umbrella understands that despite potentially being able to have control, or the right to control, they are in reality just a new structure for the worker to get paid through. The likelihood of a contractor umbrella company popping into the end-client to flex its control muscles fortunately seems very slim indeed!

That said, there are contractors who will be making the most out of being an umbrella, such as by chasing their new rights which umbrella employment affords them. Equally, there will be some contractors for whom the culture or the concept of no longer being a bonafide business means they just cannot wait to get hold of an outside IR35 contract! For the most part however, the bulk of contractors who have been used to being their own boss simply getting paid by a different structure or organisation shouldn’t make too much of a difference and, assuming all parties act sensibly, shouldn’t overly affect the day to-day working practices either.