Tax Barrister, Michael Paulin, assesses the impact of IR35 on IFAs

by | Apr 7, 2021

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‘Nightmare IR35 legislation’ – how can IFAs protect themselves? 

The inception of IR35, which more commonly is known as ‘off-payroll’ rules, can be traced to the Inland Revenue’s 9 March 1999 Budget. Designed to prevent instances of ‘disguised employment’, this legislation was first consolidated within Chapter 8 Part 2 of ITEPA 2003.

From this month an extension of Chapter 10 ITEPA 2003 to medium and large private businesses will shift the burden of tax responsibility from the independent contractor to the end-client and in turn the tax liability will transfer solely to the latter.

So what does this mean to world of IFAs? Well, if you are an independent financial adviser, who works through a limited company and provides services to private sector medium and large firms, from this April you will no longer be responsible for assessing your own tax status. That tax responsibility will fall on the doorstep of your end-clients.


Such changes have shaken up the financial services world. The immediate response from some was to bar the engagement of independent contractors who use limited company structures. There were also instances of contractors getting their contracts terminated, unless they agreed to become permanent employees. By cutting ties with limited company contractors, such companies bypass their responsibility to administer the rules.

Another, and on occasion, more problematic approach has been the shift to non-compliant umbrella companies. There have been reported cases of former independent contractors being provided to their end-clients via an umbrella company’s overarching employment contract. There is nothing wrong in principle with such an approach, but it stands in stark contrast to the genuinely self-employed status of IFAs. The additional PAYE and NI tax burden is also unwanted, in addition to the question of holiday pay liabilities, which by law must be accounted for. In some cases umbrella companies have failed to take these into account, thereby creating real compliance risks for the former contractor and end-client alike.

IFAs have deep experience balancing a range of different clients. While there may be periods when an IFA, contracting on the basis of its intermediary limited company, works with a single client – this should not be taken in any sense to mean that such a person is transformed into an employee for tax purposes. The somewhat unfair reality is that the independence that IFAs possess can be turned into an albatross around their necks when it comes to IR35: it is only right that relationships of trust develop such that an IFA may work with a single client for an extended period.


However this ought not to be taken as a dilution of the IFA’s independence and nor should it be taken to imply that such a person is automatically caught by the off-payroll rules. The interests of IFAs and end-clients are in a sense aligned for IR35 regulatory purposes: a consistent approach that ensures that end-clients get IR35 right will protect their interests while allowing relationships of trust with IFAs to continue to prosper.

Though it is true that the legislative changes shift the responsibility onto the private sector firms, this is not the burden that many in the financial services world initially consider it to be. The use of independent contracts should instead be viewed as an opportunity, a chance to benefit from their services in a way that minimises regulatory risk across the tax compliance dimension.

To help the private sector, HMRC has designed the Check Employment Status for Tax (CEST) tool to help employers decided how the work being done should be dealt with for tax purposes. Created to help, in reality it creates more issues as studies indicate that in at least 20% of cases it is unable to provide a determination at all and, as it does not allow for holistic assessments across the business of multiple contractors, it cannot deliver the corporate support end-clients need. It is important that IFAs take matters into their own hands and prepare for the changes themselves.


One of the first things that IFAs should do is lead a conversation about the new changes with their clients. It is important that IFAs are on the same page as their clients, as transparency and good line of communication will allow IFAs to be assessed fairly and prevent disputes arising.

As well as conducting conversations with clients, it is also important to reach out to fellow IFAs. Talking to other limited company contractors about their circumstances will be vastly beneficial if you’re going through a similar situation, and as these are blanket rules most IFAs will be affected in the same manner.

Practical steps include:

  • Opening up a dialogue with your client
  • Seeking support from experts as to how best manage the changes within your existing relationships
  • Ensuring any existing contracts are fit for purpose and have taken the legislative changes into account.

Though it may seem that the legislative changes are a deterrent for private companies using contractors, the reality is that they are a mere hurdle that can be readily overcome with a consistent and pragmatic approach. If there are any key takeaways from the pandemic, it is that a flexible workforce is the key to economic survival, especially as we emerge out of the pandemic.

Michael Paulin is the founder of Wolf IR35 Legal Services and a tax barrister.





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