Navigating the world of contracting has always been a balancing act, but for IT contractors in the UK, IR35 has introduced a whole new level of complexity. Designed to curb tax avoidance of individuals working as self-employed contractors while effectively operating as employees, the IR35 legislation, introduced in 2000 (but only given teeth in 2019) has left IT contractors in something on a limbo state.
I believe the legislation is a product of a bureaucracy in its purest form. We now have a situation where contractors working 'inside IR35' pay the same tax and national insurance contributions as regular employees, but have absolutely zero rights. No notice period, no sick pay, no holiday pay. Nothing.
However, this article is not to a debate of the legislation (there are already scores of articles online and there is nothing new to cover). What I'd like suggest is a new structure for IT contractors to work - one that has been used by accountants and solicitors for decades - the LLP.
I feel there is a real opportunity, in the wake of the new legislation, for IT contractors to change their relationship with clients - who for the most part view them a 'bums on seats' for a project. IT contractors banding together in LLCs to create bespoke IT firms gives them the potential to be truly self employed. The LLP (as opposed to the standard LTD company structure) is a hybrid between a traditional partnership and a limited company. It gives individual members legal protection, as it is still a separate legal entity from its partners, and offers them limited liability.
LLPs also comfortably resolve the IR35 tax issue, as LLPs benefit from "pass-through" taxation, meaning that profits are not taxed at the LLP level but are distributed to members annually, who then pay income tax on their share of the profits. LLPs also offer the benefit of less stringent reporting requirements than LTD companies, which reduces the administrative burden.
But the real genius of the LLP structure lies in its partnership system. The partnership is managed by the members, who typically have equal rights unless otherwise agreed upon in an LLP agreement. This means there is no 'equity' as such - if a partner leaves (or is voted out), they surrender their equity. As IT contractors are essentially a 'pay for time and skills' industry, this resolves the tricky situation where one contractor may leave, or not be pulling their weight, yet still own equity in the firm.
I really think there's huge potential here.. I would love small IT partnerships to become as common as accountants, solicitors, or architects - a structure in which reputation is built on the work and name brand of their partners, is flexible enough for partners to come and go, is tax compliant, and where IT contractors truly have the scope to be fully independent.