Contractors’ Questions: Can I escape IR35 by taking a fixed-term contract?

Contractor’s Question: I've been contracting for my current client for over three years on a fixed daily rate. The company gave out IR35 status determinations which I decided to opt out of because, unsurprisingly, the determinations were overwhelmingly inside IR35. As I didn’t take one, I face termination on Feb 28th – when the contract was due to end anyway.

Before the determinations, my client asked me if I would move to a ‘fixed term’ period of two years with all the benefits that an employee gets. Now, pay negotiations are due to start. The offer sounds appealing, partly as I could deliver a project I’ve invested my soul in!

Although I regard the contract I've been on since I started here as 'outside' IR35’ – it’s full of specific tasks which I worked on unsupervised, alone, would it be too risky taking the fixed-term position?

Expert’s Answer: Working off the basis that your client is offering you a fixed-term PAYE contract, IR35 will not apply under the current or incoming rules. By accepting a fixed-term contract you become an employee of the organisation you are providing your services to. You will be paid and taxed in the same way as an employee and IR35 is no longer a consideration.

This is because the IR35 legislation is designed to stop self-employed workers operating as disguised employees. The rules do not apply to individuals holding a contract of service, as opposed to a contract for services.

Ultimately, whether you choose to accept this fixed-term contract depends on personal preference. If, like you mention, you have put a lot of work into the project and are emotionally invested in it, then you may want to see it through.

That said, it sounds like you will be taxed as an employee in spite of the fact you are confident your contract belongs outside IR35. In other words, you must weigh up if completing the project as an employee is more important than working elsewhere on a contract -- outside IR35 -- where you will be taxed as a genuine contractor.

Given the fixed-term contract lasts two years, having PAYE deducted for this period of time when it’s likely you will be able to secure an outside IR35 contract elsewhere (despite some press reports stating otherwise), you may well take home less when working as an employee for this duration - even if the offer is very attractive, as you say. After all, the difference in take-home between an outside IR35 contract and a PAYE engagement can be anything up to 25%.

And while it may be worth attempting to negotiate a rate rise to take into account paying employment taxes, this could prove difficult given the business you work with will be paying Employer NI, which is a 13.8% tax.

Lastly, if you were to accept an employment contract, it’s also worth taking note of the following potential consequence. While HMRC has effectively said that under IR35 reform, it will not scrutinise contracts that no longer sit outside IR35 upon or after April 6th, the below statement taken from a government document does not entirely rule out this possibility:

“HMRC have taken the decision that they will only use information resulting from these changes to open a new enquiry into earlier years if there is reason to suspect fraud or criminal behaviour.”

In other words, HMRC has left the door open to perhaps look into contracts that shift from outside to inside IR35 or potentially even to a permanent position. If you are one of many contractors who accepts an employment position with this end-client, there is always a chance that HMRC could become aware of this and decide to look into the situation further.

The expert was former tax official Nigel Nordone, head of tax at Qdos Contractor.