Dear Contractor Doctor
I’m currently in a contract and am using an umbrella company structure however am considering changing to a limited company structure.
What I want to know is whether there is an issue with changing structure whilst still in a contract, as I will be getting the current contract altered for it to fall outside of IR35 but the contract end date will remain unchanged. The contract will essentially be identical except for 2 small sections that will be removed, however would HMRC view both contracts and see this as avoidance of IR35?
Thank you for your question.
Assuming that you are operating compliantly you will currently be treated as an employee (subject to PAYE and NIC) by your current umbrella.
You will need to review the terms and conditions and contractual obligations contained in the contract between the umbrella and the client or agency. Many contracts of this kind contain clauses that prohibit you from operating in any other way than as an employee of the umbrella. There may be a clause that calls for immediate termination in these circumstances. In any event if you do change structure a new contract will have to be entered into and again this could be grounds for breach of contract. You will need to explore this issue with the agency.
Regarding your contract, it does seem unlikely that the removal of 2 small sections will achieve your objective. If you have not done so already then consider getting an IR35 review using our online test.
The other key aspect to consider is that if you were investigated by HMRC then they would argue that the second contract was a sham and instead rely upon the first contract. In your defence you would need to argue that the first contract was infact incorrect and that the amended one was a proper reflection of the terms of your arrangement.
In summary we suggest the following:
- Carefully review the contractual conditions in the contract
- If you are free to go down the limited company route ask if the agency or client has a different contract for such suppliers or confirm that it will be the same contract.
- Carefully review the contract to ensure that it falls outside the IR35 legislation assuming that this is in fact the reality of the working relationship.