Contractors' Questions: How to work as a contractor under the new IR35?

Contractor’s Question: I’ve so far contracted via my own limited company but three options are being foisted on me for a new contract at a local council caught by the off-payroll rules:

I can be paid by my agency which will deduct PAYE and NIC and then pay me, the agency can deduct PAYE and then pay into my current company account, or I can join an umbrella company. What’s best, financially? And what about my expenses which are considerable as I live away from home during the week; how do I claim?

Expert’s Answer: Let's tackle expenses first, and the answer is straightforward: you can't claim. If they're that considerable, as you're living away from home, then that alone seems like a compelling reason to change your working practices and seek work outside IR35. Which makes the first part of your question much more straightforward to answer.

But first, let's clear up a misconception: tax is tax. It doesn't matter if you run payroll, your agent does, or your umbrella does, the amount of PAYE tax you pay is going to be pretty much identical. There are plenty of articles arguing the case either way for brollies versus PSCs when inside IR35, and the results are pretty marginal. So marginal in fact, that it's straightforward for brolly providers or accountants to make their solution the most attractive by playing tunes with some basic assumptions. The long and short is that any financial benefit you may gain is easily wiped out being off sick for a week, or finding yourself on the bench for a month.

That's why the better solution is to consider both how you're getting paid today, and what your IR35 status is likely to be in the future.

You say that you're already running a limited company; therefore, I see little reason to go to the trouble of closing down your company and moving to an umbrella. You're not going to make significant financial or time-gains in the short term. This is based on two assumptions:

1) That your accountant has everything in place allow you to work within IR35 in the public sector, and;

2) That your accountant is suitably efficient and you're not spending hours a month pouring over your books. And if that's not the case, then you probably need a new accountant, not an umbrella!

But the real question you need to ask yourself is more profound: what kind of contractor do you want to be in the future? Which brings me back to my very first point. If, at any point in the future, you want to change your working practices to be outside IR35 -- and let's face it, most committed contractors are aiming for this -- then the answer is straightforward: keep working via a limited company. You lose nothing by working inside IR35 via a limited company, but you'll pay an incredible amount of unnecessary tax by working outside IR35 in an umbrella.

The expert was James Poyser, managing director of contractor accountancy firm inniAccounts.