Contractor & IR35 myths debunked

The allure of being a contractor can seem obvious to many, increased hourly rates, variety of work, flexibility & freedom to choose who you work with to name but a few. However, with changes in IR35 legislation, tax rules constantly changing and increased competition in the contractor market, it may not be all it seems.

There are many online articles about contracting and in this blog, we dispel the myths and give you the facts about contracting in 2021 and beyond.

General contractor myths

Myth #1: Your income won’t vary from when you were an employee.

Wrong - Clearly if you don’t have a good pipeline of work, your income may be less in the short term than when you were an employee. However, contracting through a limited company can be a highly tax-efficient way of working. Setting everything up correctly initially means you can maximise your income. Contractors generally can command from 50% to 100% more per hour than an employee, however, there are costs to consider and there is less security and no employee benefits, so you must take this into account. If you are experienced and your skills are in high demand, you should expect to earn more.

Myth #2: It’s difficult and expensive to set up my own limited company.

Wrong – Using accountants like DNS make the process of setting up a limited company easy and if you sign up for ongoing accounts & tax services, we can set everything up quickly and cheaply.

Myth #3: You can pick and choose only work that you really love.

Right & Wrong - Depending on your circumstances this may be the case. As with all work, there may be aspects that you dislike. Clients can be demanding and may well change their requirements or conditions of the contracts. So, life isn’t always rosy. However, you do get more freedom to turn down work that you don’t like as much and concentrate on the work you do.

Myth #4: Being your own boss is fantastic.

Right & Wrong - It may depend on your past experiences with previous bosses, but it also depends on your resilience. Sometimes, it can be a stressful being your own boss. Ultimately, you have the responsibility to make it a success, generate the work and earn the money. However, most people find that the positives far out way the negatives.

Myth #5: There’s loads of legislation & paperwork to keep up to date.

Yes, there is some truth in this, especially when running a limited company. However, here at DNS we offer comprehensive packages to take care of all this side of contracting for you to make sure your compliant – we offer no penalty guarantees and all the support you need - leaving you to do what you do best.

Myth #6: There’s no job stability.

To be honest, if you’re an employee currently, look at your current employed contract and your current notice period. Very few jobs today offer complete stability. If the last few years have taught us anything, it’s that anything can happen to even the most stable companies – for example it could be sold or restructure or merge with another company. You at least have more control of your company’s future when you are self-employed.

Myth #7: Contractors lose out on employee benefits.

Yes, there’s truth in this. However, if you plan correctly, the additional pay and the flexibility can offset this. There are still huge tax benefits to pay into your own pension scheme as a contractor (and you get to choose the scheme and how much you contribute).It’s important you save and plan for when you need or want time off and the additional hourly rate you can earn as a contractor can offset this.

Myth #8 It’s harder to get a loan or mortgage.

True – this can be the case for your first 2 years of self-employment. In recent years, many lenders like to have at least 2 years of your financial records before offering a loan or mortgage. However, there are some specialist lenders who will offer loans and mortgages to freelancers, contractors and the self-employed. What’s important is keeping your credit score high and your records up to date and detailed and you will still have loan and mortgage options open to you.

IR35 myths

Myth #1: If you fall outside of IR35, but work with just one client, you’restill fall outside of IR35.

Wrong - If you are deemed to fall outside or IR35 within the role, but working with one client, you may still fall inside of IR35. Make sure you check out all the facts to avoid being caught out.

Myth #2: Short-term assignments are never inside of IR35.

Wrong - Regardless of the length of an assignment, IR35 assessments must still take place.

Myth #3: I work overseas, so IR35 will not apply.

Wrong - Even if you work overseas or you client is overseas, if your limited company is UK based you and your company are subject to UK tax law and general legislation.

Myth #4: You work for an agency that is exempt from IR35.

Wrong - There are no exemptions like this, agencies need to assess the IR35 status of contractors before a contract begins. A ‘Status Determination Statement’ (SDS) will need to be completed.

Myth #5 Only public-sector contractors need to worry about IR35.

Wrong - The process is different in the Public Sector and contractors are not allowed to decide their own status, but private-sector contractors are now affected by new rules. So, even if you are working in the private sector, you can be affected by IR35.

Myth #6 You must be outside IR35 because you have no employment rights.

Wrong - Employment status for tax purposes or for legal purposes is different. It is possible to be inside IR35 (employed for tax purposes) and not employed in legally. Being inside IR35 doesn’t give you any additional employee rights.

Myth #7 You’ve been working for 2 years for the same client so you’re automatically inside IR35.

Wrong - Your status is not affected by the length of time that you work for a particular client. However, the longer you work for a single client, the more likely you are to be seen as a ‘disguised employee’. Mutuality of obligation, (MOO), is one of the IR35 key tests used by a tax tribunal or court to establish whether a contractor is a disguised employee and therefore subject to IR35.

Myth #8: Because other contractors working for the client are inside/outside IR35, you must be.

Wrong - Your individual IR35 status needs to be assessed separately, and your circumstances considered. In the past, the public sector used ‘blanked IR35 determinations’ and they have been unsuccessful.

Myth #9: Your IR35 status is automatically the same for every contract.

Wrong - It’s entirely possible to be inside IR35 for one contract, and outside for the next - even when the work is the same or similar, your contracts and relationship can vary between contracts and clients. So, each contract should be assessed individually.

More and more people are choosing to become contractors, to reap the benefits such as the flexibility of being your own boss or the increased earning potential. It’s important to work through the myths and understand the truth and what this means to you is important. Then, you can make a balanced decision about whether contracting is right for you now and in the future.

If you want more information about the pros and cons of contracting or answers to any of your contractor questions, contact us today.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.