Why I’ll never accept an inside IR35 contract

We’ve all heard it; the death knell sounding for UK contracting. It continuously pollutes social media feeds ever since IR35 was reformed on April 6th 2021 in the private sector, and April 6th 2017 in the public sector, writes contractor Chris Sebok, founder of software consultancy Shadow Moses Developments.

Where we are today on IR35/OPW...

Whether you believe what you hear about contracting’s ‘last legs’ is subjective. It largely depends on how long your teeth are, how much money you’ve got in the bank, and of course the people you choose to follow on LinkedIn.

I try to keep in mind that my industry -- software -- is not the only tech sector affected by ITEPA Chapters 8 (IR35) and 10 (Off-Payroll Working rules).

I’m occasionally reminded when interacting with contemporaries online that almost every professional field in the UK uses contractors and consultants, not only to bolster their workforce to meet project deadlines, but also to engage seasoned experts to help enhance their own professional services and products. Long may it continue.

Old IR35 and unfortunate attitudes

Personally and professionally, I’ve never had a problem with ‘old’ IR35, introduced in 1999 by then-chancellor Gordon Brown.

His Intermediaries legislation aimed to address a country rife with fake employees. Looking back now, IR35 served as a way for me to figure out what the difference was between the contractors and the permanent employees I was working with at the time, and only solidified what I’d learned in my previous experiences of being in business.

And oversimplified; that’s this -- an entitled unfairness creeps up on too many contractors, whereby the understanding of ‘being in business on one’s own account’ seems to automatically translate into ‘I’m fine, I have a limited company.’

This isn’t to say of course that there aren’t many thousands of bonafide contractors out there, running a legitimate business. There most certainly are -- but unfortunately the proportion of IT contractors I’ve come across in the last 16 years who are clearly not running a bonafide business is high.

Action, reaction, and ignorance

This abuse has directly led to the reforms of IR35 -- the frameworks I nodded to at the outset -- that have been badly thought through, and hastily implemented (The National Audit Office: “Public bodies had little time with the new guidance and tools before the rules came into effect”).

Due to what came across as HMRC’s complete denial and ignorance of facts and figures about the issues with its 2017 framework, even though they were presented unequivocally by the NAO; the Public Accounts Committee and the House of Lords Economic Affairs Committee, the UK’s commercial sector got lumbered with legislation that is not only today damaging the economy as a whole, but is also ruining thousands of genuine contractors’ lives. Across the country.

Are you a no rights employee?

As a result, some three years since it was introduced, commercial clients so worried by the Off-Payroll Working Rules are in 2023 adopting a zero-hours; zero-rights, zero-benefits, zero-respect employee model. It’s so bad, the approach has even become the subject of satire at https://norightsemployee.uk/

At the time of writing, very few businesses have the time or inclination to properly grasp the OPW legislation, and even fewer are likely to take a risk where they may be a target for a massive bill from HMRC. The government has done a fantastic job of publicising the financial penalties which it has imposed on their own departments. This has -- directly or indirectly -- caused panic across the businesses that are now affected by the Chapter 10 rules, resulting in almost all contracts in my sector now being “inside IR35”, regardless of how the client expects the contractor to behave, and whether they should be declaring this at all due to the small company exemption.

Strategy

Misguided explanations range from “the client wants you to work in the office” to “the client expects you to work eight hours per day.” Such statements reflect that agents and clients are not equipped to understand the OPW legislation in full, and don’t seem to want to transition from traditional job descriptions, to tightly scoped Statement of Works delivery (akin to how most consultants operate).

What is shocking to me is how many business opportunities are being lost by contractors who agree to simply contract under a job title, rather than agree to deliver a set of services. Should a client of my company request work be undertaken outside of the agreed scope, I instantly engage “Captain Business” mode and tentatively investigate the opportunities, to increase my turnover or business stability.

Façade

Exactly what ‘inside IR35’ means is often a question of semantics. A contractor-owned limited company must exist in the chain for a contract to be inside or outside IR35. A contract that imposes the use of an umbrella company is simply not caught by the OPW legislation. This has created another type of worker; the “PAYE Contractor.” But cripplingly for both enterprise and enterprising types with ambition, income from such a contract cannot be used to run the contractor’s limited company (even if paid into said-limited company), stifling any business expansion or internal product development that the contractor may be pursuing.

The result also causes significant personal issues for the contractor. The income can no longer go towards a tax-free pension contribution; professional insurances cannot be leveraged, subscriptions, software licenses, hardware, and goods cannot be paid for (or used for the ‘inside IR35 contract). And likewise the income cannot be used to pay the contractor company’s employees, and any other benefits that are reaped through running a genuinely self-employed, self-operated company are no longer allowed.

Erosion, danger, exploitation

This erosion of control, rights and benefits is by far the biggest danger that the Chapter 10 rules threaten UK contracting with -- especially considering many contractors may not realise this erosion at first. Maybe those death knells sounding on my LinkedIn feed aren’t that out of tune with reality after all.

Many of the aforementioned perks are enshrined in employment law for permanent employees, and with good reason. PAYE contractors no longer have access to these protections but are taxed in the same way as employees, meaning they are arguably now worse off than they would be in an equivalently compensated job (which most do not want).

The systematic abuse which contractors may have once upon time contributed to by disguising employment has now turned on its head -- as now the contractor is being taken advantage of by the government in a very significant way.

They had it coming

One might argue that contractors accepting “inside IR35” roles ‘had it coming;’ that they were never self-employed business-owners, and they simply acted as employees for however long their contracts lasted.

This may sound fair, until recession hits and contracts become scarce as a result; until your energy bill rises from £90 to £350 a month due to no fault of your own, or until you realise those PAYE contractors should really be engaged under temporary employment contracts (along with the protections and benefits that come with them) rather than new ‘fake’ B2B contracts, which stifle almost all allowed self-employment benefits but put the contractor under control. A model out of this playbook, the EDM, had to be demystified on ContractorUK only yesterday, indicating that this beast is growing not retreating back into its cage.

What does outside IR35 look like? Don’t look for legislation

So, what does “outside IR35” actually look like? It certainly isn’t as cut-and-dry as HMRC’s case studies imply. Nowhere in law does it state that a contractor must have the contractual right to send a substitute, let alone having to exercise this right in practice. I would be very surprised if any sole-person software business would dare to substitute themselves, let alone a specialist individual contractor that has been taken on because of their specific skills or experience! The reality is that clients want to pay a premium for that personal touch.

There is also no mention in legislation that having invoices paid hourly, daily, weekly or monthly is a sign of employment. Further departing from what the taxman would have you believe, there are very few contracts in the technology world that don’t require some level of direction from a client. Arguably there should never be any control or supervision of the contractor, but being a single cog for a large company often makes this difficult to navigate. On the ground, then, the odds are stacked against us independents.

But genuinely self-employed contracting -- by bonafide contractors in business on their own account using a Personal Service Company, can, and is being done.

What’s key as a contractor is to be mindful of the scope of the services you have agreed to deliver to your client. Constantly represent yourself and your business as independent in every respect.

My company’s clients introduce me to others as an “independent contractor” or “external specialist” or “freelance consultant.” I constantly refer to myself as independent when working with my client’s staff members, and -- critically -- I represent myself and my business at all times and fix any mistakes that are made, free of charge. My business takes these latter steps in order to keep my clients happy and keep the relationship healthy. So despite the scare stories, ‘personal service’ can be a legitimate form of business, regardless of what HMRC thinks, and the demonisation of ‘personal service’ must stop.

Why I’d never take an inside IR35 contract

By following steps like these, and laying on a fierce show of independence, contractors will survive. We will diversify our businesses. We will change how we engage. We will adapt.

But be under no illusion. Contract work (at least for freelance software consultants like me) is extremely difficult to come by in the current climate, with outside IR35 work even more difficult to find. In my experience, most “outside IR35” work advertised is due to the small companies’ exemption. In this case, IR35, i.e. ITEPA Chapter 8, most definitely does apply, only it is the contractor’s responsibility to ensure that the regulations are adhered to. The very fact that small companies are advertising contracts as “outside IR35” is extremely worrying, considering it is not their place to declare it as such.

I, for one, will never take an “inside IR35” contract. I would sooner take a permanent job and fold my business than support a regime that promotes ‘zero-rights’ employment.

I would be much worse off in this position than if I took an “inside” role, and I’d likely be quite unhappy too, but that’s a hit I’d be more than willing to take so I wasn’t then propping up a rigged system. Refusing to accept inside IR35 work is me taking a (tiny) stand against what I regard as a thoroughly inequitable regime.

The truth is; the currently subdued market for IT contractors is likely due to way more than just IR35 reform. Lingering covid fallout; the Russia-Ukraine and Israel-Hamas conflicts, the time of the year (Christmas is a historically quiet time for software contracts), and the cost-of-living crisis. Looming recessional fears too. These are all reasons why contractors are on the backfoot, and much of their market is in the doldrums. But good old IR35/OPW is a bit like a constantly replenishing keg that can’t be removed from the alcoholic’s home.

The future

Tumbleweed where there was once opportunity might explain why, right now, thousands of contractors are accepting “inside IR35” roles. Out of desperation. But I’m convinced that the bottom will fall out of it. Who knows; maybe the IR35 offset mechanism from April 6th 2024 will (as commentators hope) encourage end-users to look again at outside IR35 contractors, knowing that double-taxation is no longer going to be ‘a thing’? I hold on to hope that the Chapter 10 rules (in their entirety) will be repealed, for the good of the economy if nothing else. Meanwhile to win business and secure contracts in other ways I shall continue to diversify, change and adapt; even if it means having to keep the heating off over winter, much to the chagrin of my wife.