If you’re passionate about building a service business, consulting or contracting, then being outside IR35 is a near-imperative. That’s because the more interesting, complex or bigger your ambitions become, the more costly it is to be deemed inside IR35.
When does it pay to be outside IR35?
By operating outside IR35 you have access to the business tax regime, which is better designed (and provides incentives) to support you in achieving your goals. Therefore, if your goals or ambitions include any of the following, you will more likely than not, be better off outside IR35:
- Developing the skills and the services you offer – by investing in training and certification, subscribing to premium content or news portals, or attending key industry events, including overseas vendor events
- Using technology for productivity gains – by investing in hardware, software and tools, such as high-end laptops, iPads, development environments, etc
- Engaging professional advisers to support you – such as accountants, coaches and mentors, domain-specific professional advisers
- Employing individuals to help with admin work – this could include spouses, or providing meaningful work experience to your children
- Winning larger contracts – by subcontracting work, or forming alliances with others
- Winning small government sector contracts – by getting on government-approved supplier lists
- Making financial provisions for fallow periods – by retaining profit to level income
- Making diverse investments using your company profits – by investing directly from your company, for example in stocks, commodities, or buy to let properties
- Working with clients further away – where the cost of travel would be prohibitive for employees
- Providing yourself with employee-like benefits – by accessing the B2B market for life insurance, health insurance, etc
- Investing in your own ideas / side-hustles – for example, building apps, creating training materials/courses, productising services, etc
- Building your brand – investing in marketing, building online/social media presence, including buying video/sound equipment
- Accessing business finance – such as loans or overdrafts to fund your growth
Operating inside IR35
On the other hand, if your goals are more modest and straightforward (simply to get paid for the work you do) then your IR35 status is less likely to be important than how much you take home. You can address the financial impact of being deemed inside IR35 by increasing your daily rate by 20-30% (and more if you have an expensive commute or other outgoings). You can operate successfully inside IR35 by adopting the mindset of an employee, and pulling that single lever: gross pay / daily rate. This should help you mitigate the additional tax burden of being a deemed employee / off-payroll worker.
Keep in mind that if you are inside IR35, you will be treated like and taxed like an employee, but with none of the benefits or protections. Therefore you may wish to “price back in” the missed benefits versus employment into your daily rate, including:
- Bonuses
- Pensions
- Company share schemes
- Holiday pay
- Company sickness pay
- Maternity / paternity / adoption pay
- Childcare
- Life insurance
- Private health care
- Company cars
- Gym membership
- Subsidised canteens
- Annual parties, incentives
- Training schemes
- A notice period
- Employment rights, including the right to a tribunal
In addition, you’ll have other costs that you need to factor in – and remember you’ll pay these after all taxes, so you’ll need to account for that in your calculation. (Multiplying the costs by 2.5 is a good place to start, so if you pay £6000 per year for travel, this will add £15,000 per year, or around £70 per day to your rate).
- Accountant / umbrella fees
- Insurances
- Equipment / software
- Travel
- Fallow periods without work
Once you’ve accounted for all of the above, you may well find that operating inside IR35 means the overall benefit compared to permanent employment is significantly reduced.
