The contractors’ warchest – spend or save?

The contractors’ warchest

Most Limited Company contractors or freelancers build up a warchest, to ensure they are covered financially for any breaks in contracting. Having provisions for such an occurrence makes perfect business sense, but what happens when your warchest is a rather substantial size? Should you spend or save?


You’ve just started contracting – what next?

When first starting out in contracting there are lots of new things to get to grips with, most of which your specialist contractor accountant can advise and support you on. But when it comes to building your warchest, this usually happens in your second year. There is no one-size-fits-all answer to this, as everyone’s needs and future plans are different.


So to prepare you in your first year of contracting, we’d advise ensuring there’s enough money in your business bank account/s to pay all liabilities (such as taxes due) plus your personal salary and dividends. Once you’ve established you can do this (with profits left in your company) then it’s time to consider your warchest.


What are the options?

Once you’re in your second year and have reached your ISA allowance of £15,240 it’s time to consider what to do with the profit left in your company.


One option is to leave it be for a rainy day or break in contracting. Whilst this is strongly advisable for all contractors who are planning to remain in contracting for the foreseeable future, it’s not always the right option for everyone, especially if you’re close to retiring or returning to permanent employment for good.


Another option is to take money out of your Limited Company as dividends over the higher rate.


Whilst our team of expert contractor accountants can advise you from an accountancy point of view, once you have made the decision to take money out of your warchest, we strongly advise that you appoint an independent Financial Adviser. Here at Intouch Accounting, we recommend Penny Matters, who can provide you with tailored advice on mortgages, pensions, life cover and much more.


Set a target to work towards

A good starting point with your warchest is to consider a target you’d like to reach, then ensure you get there before deciding what you’re going to do with your funds. It’s very easy to see the amount steadily getting larger and starting to let your mind run wild, but ensure you speak to your contractor accountant about a realistic financial goal and how you can reach it.


Remember! Your financial obligations as a Limited Company contractor must always come first, so ensure your ducks are in a row before deciding on what to spend your profits on.


This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

June’s questions of the week

Adrienne - What do I need to do apart from setting up my Limited Company Adam - How do I choose the perfect Limited Company name Adrienne - is going Limited the right choice for me Adam - business bank account Adrienne - How do I set up y Limited Company































The new tax year – how today’s changes could impact your contracting life

The new tax year

Today marks the start of the new tax year, that will bring changes which could affect many contractors’ take home pay. In this blog we outline the top 10 changes, to ensure you’re fully prepared.


1Dividend allowance

The first £5,000 you take in dividends annually will be tax free (this is on top of the income tax personal allowance), then anything over that will be taxed at the following rates:

Basic rate: 7.5%

Higher rate: 32.5%

Additional rate: 38.1%


Our new dividend calculator will give you a clear indication as to how much more tax you’ll pay for 2016/17.


Tax will not be deducted at source and taxpayers will have to use their Self Assessment Tax Return (SATR) to pay any tax owed. So basic rate taxpayers receiving £5,000 or more must complete a SATR.


2. Capital Gains Tax (CGT) will reduce

If you sell an asset that has gone up in value, then CGT is the tax you will have to pay on that asset. Depending on the rate of income tax you pay, CGT will either be payable at the basic or higher rate. If you’re selling residential property, CGT only applies to any additional properties you may have (other than your main home).


From today the rates for CGT are:

Basic rate: cut from 18% to 10%

Higher rate: cut from 28% to 20%


3. Flexible ISA

From today should you wish to withdraw and replace your ISA funds within the same tax year, you will not lose the full ISA tax benefits.


If you have money in stocks and shares ISAs you should also be able to do the same, if you withdraw and replace via a cash trading account.


4. Personal Saving Allowance

Anyone aged 18 + will be able to earn up to £1,000 a year on their personal savings – tax free.

Take a look at the tax rate bands to see how you can benefit:

  • Basic-rate (20%) taxpayerscan earn £1,000 of savings tax free (saving a maximum of £200 compared with 2015/16 tax year).
  • Higher-rate (40%) taxpayers can get a personal savings allowance of £500 (saving a maximum of £200 compared with 2015/16 tax year).
  • Additional-rate (45%) taxpayers earning above £150,000: £0unfortunately do not get an allowance.


See the Treasury’s factsheet for more information. The Personal Savings Allowance is being dubbed as the ‘biggest savings shake-up for a generation’, so don’t miss out!


5. Income Tax and Personal Allowance thresholds increase

Taxable income rate: from today will rise from £10,600 to £11,000

Higher rate income tax: the 40p threshold will rise from £42,385 to £43,000


6.New State Pension is introduced; current state pension rises

You will receive the new State Pension if you retire today and are:

Female: born on or after 6 April 1953

Male: born on or after 6 April 1951


The flat rate State Pension is £155.65 per week but the amount you’ll receive will depend on your National Insurance (NI) contributions:

35 years of NI contributions: you qualify for the full allowance

At least 10 years of NI contributions: to qualify for part of the weekly allowance

Less than 10 years of NI contributions: you will not receive any of the State Pension


If you retired earlier, you’ll receive the old state pension, which will increase to £119.30.


7. Innovative Finance ISA (IFISA) will launch

If you use peer-to-peer (P2P) platforms to save then the new IFISA will allow you to get tax free returns. Whilst one of the attractive qualities is the higher rates of interest, it’s worth being aware that P2P isn’t protected by the Financial Services Compensation Scheme (FSCS).


8. Lifetime Allowance cut

Today will see a reduction in the amount you can save into your pension without a tax charge – AKA your Lifetime Allowance – from £1.25m to £1m. Your pension benefits are tested against the lifetime allowance as soon as you start to draw your benefits.


Despite the government’s claims that the reduction will only impact 4% of the wealthiest population, it will also hit those people working hard to save for retirement. You can protect your pot if it exceeds the Lifetime Allowance.


Remember! Be careful with Auto-Enrolment, as any contributions you make could wipe out any protection you may have. We advise that you discuss this with an Independent Financial Adviser, to ensure you have the right advice and support for you and your circumstances.


9. Annual Allowance Taper will be introduced

For higher earners, the annual pension allowance will gradually be reduced. At present it’s set at £40,000, but the government is set to introduce a taper system that will reduce the limit for those whose income exceeds £150,000. The reduction rate will be set at £1 for every £2 of income, meaning that if you’re earning £210,000 or more, your annual allowance will be reduced to £10,000.


10.National Living Wage and Stamp Duty Land Tax increases

Both have already been enforced, as from 1 April:


National Living Wage (NLW): anyone aged 25 or over will receive £7.20p/h, an increase from the previous NLW of £6.50p/h.

Stamp Duty Surcharge: an additional 3% has been added onto the current stamp duty rates for anyone who purchases a second home or a buy-to-let property. Whether you’ll have to pay or not will depend on your individual circumstances. But it is likely to hit tenants who are charged more rent to cover the additional cost to their landlord’s.


So there you have it, 10 changes for the new tax year that every contractor should be aware of. If you’re wondering what these changes will mean for you, we’ve created our top 10 new tax year resolutions to aid contractors in staying financially fit this new tax year. Download them today for the ultimate in contracting success.


This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

What makes a successful contractor?

What makes a successful contractor?

At Intouch, we constantly strive to deepen our understanding of the contractor landscape so that we can provide the best possible service to our clients and help them to become a successful contractor.


Over the past few months, we have been carrying out research so as to provide us with the insight we need to provide a tailor made service to contractors in a number of different sectors.


It’s great to get feedback and to know the service we provide is hitting the mark as well as ways to make it even more beneficial to the UK’s contractor workforce.


Through talking to clients and contacts in the industry, we have gathered some invaluable insight. Some of this feedback is just too good to keep to ourselves, so we have collated any information that could help contractors to get a head start or a leap up the ladder. We’ve also identified some key Do’s and Don’ts to watch out for.


Making a successful switch to contracting

Generally, it is the flexibility and control of contracting that pulls people away from permanent employment and into a more temporary way of working.


Contractors say that it isn’t an easy option. However, it can be a very empowering way to work as you have far more control over your working hours and conditions – making it a great option for those with family commitments or other interests outside of work.


“Contracting can be feast or famine but it is a great way to use your experience built up over many years. Don’t be afraid of the change and embrace the freedom contracting can provide.” Alex Paton, Ctrl Cee Limited


The frequently changing nature of contracting provides good opportunity for variety. As I’ve written about before, switching contracts and even industries is a great way to keep a career fresh and gather a wide range of experience.


The ability to learn new skills and develop existing ones is another big draw, as well as the independence, responsibility and reward of being the actual product.


“Although I’ve only been contracting for a short time, the benefits have changed since I started out. Firstly it was purely financial. Once my confidence grew as a developer and by constantly striving to develop myself as a product, the skills benefit has now become my main driving force.” Paul Davies, Sunny Robot Limited


Of course, the financial aspect plays a part and being able to make the most of your income is a very good reason to start contracting. Those bringing in an income of over £25,000pa tend to create Limited Companies to maximise earnings even further. In our recent survey of IT professionals, we found 69% of those who were contracting were doing so as a Limited Company.


The Art of Contracting

As with everything, the path to contracting success isn’t always smooth. Here are some of the key lessons a few of our clients have learned along the way:


  • be positive and professional at all times. Every meeting is a potential job interview and you are living your personal brand at all times
  • make sure you know what only you bring to the role and get a measurable deliverable to focus on (even if you create this yourself)
  • keep an eye on the future and where your next contract is coming from
  • maintain your network; keep talking to people, keep helping others and keep your eyes and ears open for new problems that need solving in the company you are in
  • try to take a step back and break free from company politics



  • be afraid – have confidence in yourself and your ability
  • underestimate the importance of building relationships with the clients you will be working with on a daily basis
  • be shy in making it known that you are achieving your objectives and goals
  • make too many emotional attachments as you might in a permanent role, so that when the inevitable contract change comes around, it is a lot easier to deal with
  • struggle to keep track of time-consuming accounts and complex tax legislation yourself. Appointing a contractor accountant can help make life easier, increase your understanding and provide support and guidance along the way


“My advice for anyone considering a career in contracting is to go for it and have confidence – if you are successful as a permanent employee and enjoy meeting people then with the right attitude you will succeed at contracting.” David Martin, Comprehend Solutions Limited


Get the right help

One of the perceived barriers to contracting is that people worry about the accounting process. Our client testimonials tell us that by bringing our team of friendly and professional contractor accountants on board, they are free to focus on delivering and growing the business.


To find out how we can make your life easier and help you to be a successful contractor, speak to one of our expert contractor accountants today on 01202 375562 or email


With thanks to the following for their contribution to this article:

Samantha Bell, DML Strategic Communications Ltd.

Paul Davies, Sunny Robot Limited

Alex Paton, Ctrl Cee Limited

David Martin, Comprehend Solutions Limited


This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Cyber Monday!

It’s Cyber Monday!

To celebrate Cyber Monday we’re offering two months free accountancy when you sign up with us by 9th December! Plus, if you need your Limited Company setting up we will do that for you for free as well.

Cyber Monday



This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Thinking of contracting or freelancing? Which trading model is right for you?

Limited, Umbrella or Sole Trader?

Are you thinking about making the move away from permanent employment to set up as a contractor? Sole Trader, an Umbrella or Limited Company? What’s the difference and which is best for you?

Read this blog to get to know your choices, then download our comprehensive guide to help you weigh up:

  • the things you need to consider
  • your options
  • the associated advantages and disadvantages
  • next steps.

Or give us a call on 01202 375 491 to chat through your options.


Why bother?

With the country’s top contractors reportedly earning around three times the average UK wage, why aren’t all permanent staff taking the leap into contracting? One reason may be the confusion surrounding available options. Our following example shows you how the options can affect a professional who is considering leaving permanent employment, and how certain factors can determine what is the right path for him to take.


Meet Peter

Peter works in IT and has been a permanent employee for 15 years. A few of his friends have recently told him about the benefits of moving away from permanent employment, and naturally Peter is curious, but unsure of his options. A friend advises him that he needs to establish if he should be a freelancer or contractor and how he will operate: as a Sole Trader; under an Umbrella; or as a Limited Company. These decisions are important, as they will have an effect on how he will pay the relevant tax due to HMRC in the future. What is right for Peter’s friend may not be right for Peter’s personal circumstances so he needs to make sure he is clear on what his options are.

So let’s take a look at each, and which solution will work best for Peter:

Freelancer or contractor?


While researching the marketplace, Peter finds a number of ad hoc jobs which are task-specific, and would not be extended once the work has been completed. For a number of these jobs he could complete them either in the client’s workplace, or from his home office. He could take on as many jobs as he likes from numerous clients, simultaneously, charging an hourly rate.

In this instance Peter would be a freelancer – an option popular among consultants, creatives and journalists.


Peter continues researching the market and finds work with a third party employer, whom he will work for exclusively for a fixed period of time. He will be paid a daily rate, and travel to the office each day to work a set number of hours. The contract can end or be extended at any point, and Peter could expect to earn approximately £600 per day.

As Peter will solely be working for this one client for the duration of the contract, he would be considered to be a contractor.

As Peter works in IT, being a contractor is a more viable option for him.

Now Peter has established what type of worker he is, he needs to select the right trading model for his situation.

Sole Trader vs Umbrella vs Limited Company

Peter now needs to decide how he is going to operate: as a Sole Trader; under an Umbrella; or as a Limited Company. These are the three most popular options for for knowledge-based, highly skilled workers earning well above the National Minimum Wage but are dependent on what solution suits an individual best, their daily rate and how they wish to operate:

Sole Trader: is a person who wishes to be the exclusive owner of the business, and is therefore entitled to keep all profits, after tax. A freelancer traditionally would consider themselves to be a Sole Trader, or self-employed. They are also liable for all losses so if the contracting business gets into financial trouble, the Sole Trader is personally liable and their private assets could be at risk. It is unlikely that an agency would take him on this basis and very few clients would allow this model so it is therefore impractical. For this reason being a Sole Trader isn’t the best option for Peter.

Umbrella: is a company which acts, for a fee, as an employer for a contractor who will have an agreed fixed-term contract. Traditionally contractors earning less than £30,000pa or who are new to contracting and are just dipping their toe in the water to see if it is the right option for them, are recommended to consider using an Umbrella company. Intouch do not offer Umbrella services, so we suggest carefully researching compliant companies offering this service and choosing one based on your personal preferences and requirements.

If Peter was earning less than the £30,000pa (on average £125 per day) or didn’t want the added responsibilities which come with running a Limited Company, then an Umbrella company solution would be best for him. He should also consider working under an Umbrella if contracting is just a short-term option for him and he doesn’t anticipate it lasting for more that 6-9 months in total.  But, as Peter is in this for the long-haul and charges a higher daily rate, he is confident he can run his own company.

Limited Company: is for a contractor or freelancer who is earning on average over £30,000pa. This is just a guide and setting up as a Limited Company can also potentially benefit those expecting to earn less than £20,000 in some cases, so if this applies check with a professional contractor accountant to ensure you get the best advice and choose the right option for you.

A Limited Company ultimately allows a contractor to take the highest rate of take-home pay and be your own boss, but there are a number of considerations and responsibilities which must first be explored, and subsequently be adhered to. Engaging the services of a reputable contractor accountant means that they should guide Peter from the offset so he is fully aware of his responsibilities and obligations. The added benefit is that often the tax savings realised with the advice of a contractor accountant out-weigh the costs as professional fees are tax deductible and, of course, Umbrella companies also charge a fee or percentage for their services (which is often more expensive). If, as expected,  Peter will earn £600 a day as a contractor, and is comfortable with the responsibilities, then he would be better suited to set up his own Limited Company. Using our free take home pay calculator Peter can compare take home pay based on several stated assumptions. He can input his personal contract income and contractor expenses to instantly see the difference being Limited makes.

There are other things to consider, from creating a company name and formation, to setting up a business bank account but working with a specialist contractor accountant such as Intouch Accounting means a lot of that is taken care of as part of our fixed monthly fee.

So once Peter has made his mind up about which solution works best for him and how he will operate, he is ready to make the move!

What’s next for you?

To help you think through your options we have written a new guide for contractors and freelancers: Limited Company, Umbrella, or Sole Trader – which is the right choice for you? available for you to download now.

Or contact us for a no obligation discussion to work through your options.

Intouch can help you

If the prospect of going contracting is still daunting and you are not sure where to go from here, or just need a chat with one of our experts, give us a call on 01202 375491  and we will happily discuss your situation and options with you. We are renowned with our existing clients for our dedicated service and account management, and we’re happy to take your call and assist you on this exciting new venture!

Call 01202 375 491


Download our guide


This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

[download_pdf file=”” title=”Download our comprehensive guide”]

How often can a Limited Company director draw dividends?

Drawing Dividends

Contractors are increasingly turning to forming their own Limited Companies rather than operating as sole traders or under Umbrella companies. This is in part due to the tax efficiencies available as well as the additional security it offers.


Why go Limited?

Whilst the ‘sole trader vs Umbrella company vs Limited Company’ debate is one which has been going on for quite some time and will continue to do so, the bottom line is that for many contractors, going Limited is the best approach. Why? Just a few advantages include:

  • Higher take-home pay
  • The ability to claim on a wider range of expenses
  • Flat Rate VAT Scheme entitlement
  • Security of personal assets
  • Greater control (when compared to using an Umbrella Company)
  • Better credibility
  • Greater tax planning opportunities


How do you pay yourself?

As a sole trader, the business’s money and the contractor’s personal money are one and the same. However, once a Limited Company is formed, these become separate entities and the money of the company and the contractor are separate, providing additional financial security.


In order for the contractor to ‘pay’ themselves as tax efficiently as possible, it is generally the case that they are paid a mixture of salary and dividends (depending on their circumstances and IR35 status), both of which should always be discussed with an accountant.


For those unaware, dividends are payments made to the owners of the company, ‘the shareholders’, from the company profit. Company profit is not only income less expenses for the current year, but also takes into account the Corporation Tax that will be due. It also includes any retained profits or losses brought forward from prior years. In some respects, dividends can be complex, however as a general rule, so long as the company has the money to be able to make the dividend payment and cover any tax and VAT due, there won’t be any issues.


One question which many contractors ask time and time again, however is:


How often can you draw dividends?

There are two types of dividend – Interim and Final. Interim dividends are those paid throughout the year, with Final dividends paid once annual accounts have been completed. Within a small company, the accounts are rarely complex, which means Interim dividends can be paid throughout the financial year. It is worth noting here that dividends are received on the date they are declared and, as such, it is important to consider the declaration date when declaring dividends close to the end of the tax year, as it can be an incredibly useful tax planning tool.


To answer the question asked however, it is important to understand that the frequency with which dividends are declared is much less important than whether they are legal or not. An illegal dividend, as outlined in The Companies Act 2006, Section 830, states that, ‘a company may only make a distribution out of profits available for the purpose’.


This simply means, that as long as a company is in a position to cover the dividend as well as their tax liabilities, the dividend can be legally declared. If declaring the dividend would result in the inability to satisfy tax and VAT obligations, it would be illegal and may result in repayment demands from shareholders (the contractor).


For many contractors, drawing a regular dividend is a sound way of financial planning; ensuring that your earnings are as tax efficient as possible and that a regular income is received. So long as the dividend is legal, the frequency at which they are drawn is down to the individual contractor’s discretion; something which is great news to contractors worrying that a dividend could perhaps only be taken at the end of a financial year.


For further advice on drawing dividends from a Limited Company, why not see our full guide, or for full financial planning support, give us a call today on 01202 375 562 to discuss how Intouch Accounting’s team of expert Contractor Accountants could help you make the most of your Limited Company.


This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

How to avoid time between contracts

How to avoid time between contracts

As all contractors know, having a steady stream of contracting jobs is essential to keep the flow of money coming in. The length of individual contracts can vary widely and there can be opportunities for extensions, so in some cases a contractor could be with the same client for quite a while. Nonetheless at some point the contract will end and a new contracting role will need to be found.  If you’re keen to work constantly, with back-to-back contracts throughout the year, there are a number of things you can do to ensure that you’re aware of opportunities and are more able to match your availability to roles as they come up.

Let recruiters and contacts know when you’ll be available

It’s quite common when you’re in the middle of a contract to be so focused on the work in hand that you forget to plan ahead. However, if you know that a contract is not likely to be extended, as the end date comes closer it’s helpful to update your CV and online profiles to show when you’ll be next be available. If you have agency and other contacts it’s also worth contacting them as they may not be aware that your current contract is about to end and don’t rely on your current agent alone.   It is unlikely that they will be monitoring the end of the contract they placed you on. Recruiters are focused on current vacancies and candidates who can join immediately and so may not be aware of those whose contract is coming to an end. If you leave things until the very end of your contract you’re more likely to have gaps between jobs as the process of finding your next contract, interviewing and starting could take a week or two, or even longer.

Explore other options with your current client organisation

In larger organisations there may be opportunities in other areas of the business. Different departments within a business may need your skills so it’s worth finding out what’s going on elsewhere in the organisation. You could make contact with other departments either directly, or through your agency, whichever is appropriate. Generally clients like to have contractors who are familiar with their business, so if you’re already working for them it can give you a real head start. Even if this approach doesn’t produce an immediate opportunity, it’s still worth exploring as it may produce something in the future.

Keep an eye on job boards

It’s possible to set up daily or weekly email alerts which list the latest jobs which meet your criteria. This is an easy way to keep up with what’s available and often these roles have slightly longer lead times so you can realistically pursue them while you’re still in your current contract. Agencies often advertise roles in this way, so it can be a good way of connecting with them too which may also open up new prospects.

Maintain relationships with your contacts

Keeping in touch with people you’ve formed good business relationships with is always worth investing time in. Whether you do this via platforms like LinkedIn, through phone calls or face-to-face catch up meetings and networking will depend on your schedule. Do factor this in though as it’s an essential part of your personal marketing. Keeping these contacts up to date with your projects and availability can potentially lead to contracting work and of course is also a good way to keep up purely socially with your peers and clients.

It’s a good idea to schedule some time in your weekly routine to search for potential contracts, update your CV and profiles and keep up with your contacts. This way you’ll be aware of what’s available as well as being visible to potential recruiters. This approach should help keep the contracting work – and the income – rolling in.


This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Unlimited shades of grey as HMRC closes in on IR35 abusers

HMRC closes in on IR35 abusers

As the post-Summer Budget dust starts to settle, there is a hotly debated topic still keeping contractors awake at night. Last week I started to look at the proposed changes to dividend tax, which form part of a series of wider reforms to the Intermediaries Legislation, commonly known as IR35.

The publication of HMRC’s IR35 discussion document in July has triggered a growing sense of unease amongst the contractor community. The big concern is that these latest attempts to achieve clarity will only serve to move the onus of declaring a worker’s status from the worker themselves, to the reluctant client.

The story so far

In order to get on board with the so-called “Rationale for Change”, it is important to first understand the current situation…

Under the current ways of trading with a client, self-employed workers have been able to use employment intermediaries such as Umbrella companies, employment businesses and Personal Service Companies (PSCs) as a way to reduce their tax and National Insurance payments.

As a result, people pay different levels of tax depending on whether they are employees, self-employed, or work through their own Limited Company.

An example of this is a contractor being able to claim tax relief for travel and subsistence costs to and from their usual place of work, whereas an employed worker doing exactly the same job would have to grin and bear it with no tax reliew for themselves. It is this disparity that the Chancellor, George Osborne, wants to even out.

Who is at risk?

Most contractors are operating fairly and squarely through these employment intermediaries and have legitimate and justifiable reasons for working through a Limited Company, such a the protection of limited liability, greater flexibility and long-term planning options. However, some are taking unfair advantage of the system and it is these “abusers” that the Chancellor has set his sights on catching.

In my view, anything that helps police the industry more effectively and “level the playing field” so it is fair to all, is a good thing. By tightening the noose on IR35 abusers, the Chancellor is paving the way for legitimate PSCs to get on with what they do best and being recognised for the valuable contribution they make to the UK’s flexible workforce.

Understandably the fear is that, rather like trawling the ocean to catch a few naughty fish hiding in the shadows, many compliant businesses will be caught up in the new measures designed to better fill the Treasury’s coffers. The other contentious matter is introducing the concept of “fairness” to a moral and ethical debate. How can ‘fair’ be anything other than subjective?

As you can see, the situation is not as clear cut as HMRC would like us to think. The Treasury’s promise to the Chancellor that the IR35 reforms could help raise an additional £430 million is, in the view of many commentators, unrealistic.

There may be trouble ahead

A key flaw in the discussion document’s suggestion is the proposal of putting the responsibility of assessing a contractor’s IR35 status onto the engager. This is likely to cause a serious headache for UK employers. Why does HMRC think engagers will be any more accurate in doing this than the worker, unless it is accompanied by transfer of debt provisions?

To me, this is where the reforms start to unravel. Is the tax man seriously expecting people to put up their hands and declare, “I am Spartacus!”?

The current guidance for identifying “supervision, direction or control” [see ESM2029 for examples] to help assess the worker’s tax status is, in itself, entirely based on hypothetical examples and open to misinterpretation in the real world. This is a subject I will be exploring in more detail on the Intouch blog over the coming weeks.

The constant challenge for HMRC is deciding who should, or should not, be either side of the IR35 dividing line. In an ideal world, HMRC would like to make every PSC worker or self-employed contractor fit in a neat little box and put the onus on the engager to determine where they slot in on the compliancy scale.

After reading the discussion document, you would be forgiven for thinking that every individual case is easy to assess. The case study examples are so clear cut and unrealistic it’s almost caricature.

For as we know, the reality of whether IR35 applies or not is anything but black and white. In fact, there are so many shades of grey in between that there are almost unlimited ways to argue the situation.

This is why HMRC has struggled to enforce legislation in the past. So although its good intentions are to be supported, viewing the current landscape through an oversimplified lens and merely playing around with subjective rules is unlikely to improve effectiveness of the current legislation.

To make a real difference, HMRC needs a system that sorts the wheat from the chaff, and can identify abusers based on something other than gut feel. They should not be scared of rapid expansion in a modern method of working just because the Treasury would be better off if we were all permanent employees.

I have no doubt HMRC recognises and accepts the reality of this deeply complex issue and wants to develop solutions that work within the grey areas as well as the black and white ones. The discussion document asks for help and, as stakeholders, we must respond responsibly and impartially. It is still better for Spartacus to identify himself rather than letting the soldiers of HMRC do it.

There’s no doubt the industry faces change ahead. But rather than hiding away, now is the time to fasten your seatbelt and talk to your accountant about what changes you might need to put in place to reinforce best practice standards and compliancy.

If you haven’t already, I recommend anyone who suspects they might be affected by the changes should read HMRC’s Intermediaries Legislation (IR35): discussion document or speak to your trade body and get involved in the conversation while you still have a chance to make a difference.

At Intouch our priority over the weeks and months leading up to next April is to advise and support our clients making the correct decision on their IR35 status.

If you are concerned about the proposed IR35 reforms or your compliancy position, give our team of expert contractor accountants a call on 01202 375491 and let Intouch make this complex issue a simple one to resolve.


This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.