Contractors’ Questions: Will a partnership be immune to IR35 reform?

Contractor’s Question: Would setting up a partnership with a number of contractors help to mitigate the risk of being found inside IR35 from April 2020, by a private sector client? 

 Expert’s Answer: The answer is, it depends. There are three possible interpretations here:

1. Traditional Partnership

This would be a group of registered self-employed individuals coming together to operate in partnership but with no separate legal structure in place such as a company. In this case, the individual contractors would pay tax at the same rate as employees (20%, 40% and NIC at 12.8%) and IR35 does not apply.

2. Formal Limited Liability Partnership (LLP)

An LLP is very similar to a limited company except it requires two members. Unlike a limited company where the director is able to pay themselves a small or no salary and draw the rest as dividends, a partnership’s members are taxed as employees of the business, as described above. IR35 is therefore irrelevant in most cases as income tax and NICs will already have been paid.

3. Limited company with more than one shareholder and director

HMRC will ‘look through’ any arrangement that they believe to have been artificially created  so there needs to be genuine reasons for this structure. If a group of like-minded contractors come together to form a limited company of which they are all shareholders and directors, IR35 will apply.

While this approach may offer a level of evidence with regard to the availability of substitutes and an impression of a bigger business, it will not be a guarantee that each contract will be deemed to be outside IR35. HMRC will still want to review the terms of each individual contract and the working practices in place at the end-client.

The expert was Helen Christopher, operations director at contractor accountancy firm Orange Genie, and the host of a private sector IR35 reform survival webinar for ContractorUK.