My client is now PAYE or umbrella only. What should I do?

Aren’t IR35 blanket bans like this illegal?

Yes, and no. The off-payroll changes arriving in April 2021 impact clients that engage PSCs  (personal services companies / limited companies), and the legislation states that clients must take ‘reasonable care’ in determining the IR35 status of PSCs. A blanket inside IR35 decision might show that reasonable care had not been taken.

However, there’s a very straightforward lawful loophole for clients. The off-payroll changes only apply to PSCs. If you don’t have PSCs, you don’t need to worry. Many of the blanket inside IR35 determinations that you’re seeing are officially ‘corporate policies that ban PSCs’. The outcome is the same: no opportunity to work outside IR35. But the semantics, and thus the legality, are different.

Why are clients banning PSCs?

We’ve been following this closely on our spin-off site,, and it’s clear from the thousands of contractors that have posted insights that the motives for this approach vary. 

They include:

  • Lack of information from HMRC – HMRC’s information has been thin on the ground, and very volatile. The CEST tool has changed recently, meaning the goalposts are moving weekly. Yesterday’s assessments may no longer be valid. Many organisations are going to sit this out for a few months until more clarity emerges.
  • Overwhelmed – 400,000 contractors need assessing before April, and most firms simply don’t have the expertise to do this, and CEST isn’t fit for purpose. Banning PSCs in the short term is an easy option.
  • Risk – building on the above, many clients see IR35 as an uncontrolled risk, and banning PSCs is a quick way to mitigate it.
  • Cost – banks aren’t able to reclaim VAT on services provided by PSCs, but PAYE doesn’t attract VAT, so there’s an instant 20% cost saving by banning PSCs.
  • Desire to reduce contractors – many organisations have been contractor-heavy and are using the off-payroll changes to try and move key resources into permanent roles.
  • Desire to offshore – some organisations are accelerating offshoring plans. 
  • Consultancy firms – we’re now starting to see reports of large consultancy firms running IR35 assessments and determining the majority of contractors inside IR35. There’s a clear conflict of interest here.
  • Following the leader – particularly in banking, many clients are telling contractors that they’re doing what their competitors are doing.

There’s no simple answer. This also means the medium to long term outlook will vary from client to client.

Will the PSC ban be lifted?

That’s the million-dollar question. The market is very turbulent at the moment, but our medium to long term view remains the same: we think the market will re-settle and outside IR35 opportunities via PSCs will emerge, it’s just going to take a few months to correct.

In the new, post-April, contracting and consulting market, we’re likely to see two tiers of engagement emerging. There will be a greater number of inside IR35 roles offered as fixed-term contracts/PAYE – these are roles that arguably should have been inside IR35 all along. 

The second tier will be for contracts that are clearly and confidently outside IR35. Market forces alone should enable this: this will be for highly skilled / niche contracts provided by contractors and consultants who are in business on their own account.

We’ve been speaking to pragmatic agents who are ahead of the curve – they’re using third-party assessors to assess every contract, and give clear a determination to client and contractor alike. We’re also seeing smaller consultancy firms coming forward who are better able to engage contractors fairly and manage risk on behalf of clients.

When clients banned PSCs in 2020, before the legislation was delayed, we saw delivery risks to large organisations, and we heard from PMs that many regulatory projects were at risk. We know of one large client where this had been escalated to board level, and plans were afoot to unstick this situation. The likely approach from large organisations will be to prioritise resource requirements, start at the top and begin the process of assessing IR35 fairly. 

Consider what happened in the public sector: off-payroll landed in April 2017, and a number of large organisations banned PSC contractors (TfL were the first). Two years later and outside IR35 opportunities are abundant in the public sector, including at TfL.

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I’ve been told to go PAYE/umbrella. What should I do?

The answer to this is personal to you – it depends on many factors, both personal and within your industry. The main options available are:

  • Accept the contract, and settle in for the long haul (be careful, see below)
  • Accept the contract, keep actively looking and ready yourself to move to an outside IR35 contract (be careful, see below)
  • End your contract, and move to another PAYE/umbrella client
  • End your contract, and move to an outside IR35 contract with a new client
  • End your contract, take some time out

To decide on the option that’s right for you, there are a few things you need to consider:

  • Have you been inside IR35 all along? Have you had a third-party review that shows you’re at risk of being inside IR35? If you’re delivering skills in such a way that you’re always likely to be inside IR35, now’s the time to rethink. Either accept this or change your approach.
  • Are your skills transferable? Most skills can transfer across industries – is it time to look at other industries where PSC bans are less common? 
  • What does the scale-up / challenger scene look like in your industry? For example, there are a lot of well-backed fintech scale-ups who are looking for contract resources at the moment.
  • Given so much work is now remote, and you cast your net further afield? For those who want a physical presence, would you be excited to travel somewhere new? For example, there’s a hot spot in Edinburgh of outside IR35 public sector roles. It could be a great place to be based for a few months.
  • Are there other contracts available? Despite being willing to travel with transferable skills, it may well be that contracts aren’t coming up at the moment. (Head to to see the latest outside IR35 contracts, and sign up for email alerts).
  • Your personal finances and goals – many contractors are using this as an opportunity to put themselves on the bench, take training, rest up, take holidays, train for sporting events or finish DIY projects. Do think if now would be a good time for this – but obviously it depends on the size of your war chest.

Caution: be careful about accepting PAYE/umbrella at the same client

If you’re considering accepting a PAYE/umbrella contract at the same client, you need to think very carefully about this, and the risk of a retrospective tax investigation.

There’s a risk that if you’re outside IR35 on Friday, and return on Monday inside IR35, that HMRC may deem your engagement was inside IR35 all along. Should HMRC succeed in their challenge, you will be liable for the back taxes and penalties.

In HMRC’s IR35 factsheet to contractors, they state that they “will not use information resulting from these changes to open a new enquiry into earlier years unless there is reason to suspect fraud or criminal behaviour.”

However, trust in HMRC amongst the contracting community is at an all-time low, following the loan charge scandal.  As a result, we’re seeing countless examples of contractors changing roles:

  • “Will be leaving before April to avoid risk of HMRC investigation”
  • “I feel I have to leave my current contract to avoid HMRC investigating”
  • “Exposure to HMRC investigation means I’m leaving”
  • “Contractors already looking at leaving…so they’re not caught by retrospective HMRC action” 

Many contractors don’t want the worry of an HMRC investigation hanging over them, so they’re changing clients to mitigate the risk. This is leading industry commentators to describe the coming months as “a big game of musical chairs”. We think the impact on clients of this turnover alone will quickly outweigh the costs of getting IR35 correct in the first place.

If you are thinking of changing clients then off-payroll legislation looks at when you worked. If you are considering changing clients, ensure all work is completed by April 5th.

What rate do I need to net the same as my PSC?

Moving from running a PSC to engaging via an umbrella will impact your net pay. Unfortunately, it’s likely at the moment that you won’t have much wriggle room to push up your rate due to an over-supply of contractors and consultants. If you were in the position to push up your rate, you’ll need to consider the cost of:

  • Employers NI and the apprenticeship levy – which the agent may make you pay (technically, they can’t – but this is a very grey area in the law)
  • The umbrella fees
  • Forgoing day to day expenses, such as travel and subsistence
  • Forgoing your provisions for holiday, sickness, parental leave
  • Forgoing investments in a company pension scheme
  • Forgoing investing in yourself: training, marketing, etc
  • Forgoing any benefits you have from your limited company: life insurance, health care, company car, mobile phone, equipment, etc

In doing this, you may also wish to consider the packages offered by the client to permanent employees. You may find that your rate is cut to be closer to a permanent employee, but with none of the benefits. This could give you leverage in negotiations. 

My agent is blocking me from using my preferred umbrella

It’s not surprising. There are two points of view here: the first is that given the number of shady umbrella companies that have sprung up over the last 20 years, agents want to maintain their reputation by only recommending vetted umbrellas.

The slightly more cynical view is that most umbrellas pay commissions to agents and many other umbrellas are owned by the same parent company as the recruitment agent. So it may be commercially motivated. Why not ask your agent? They may be falling short of their obligations under the Bribery Act if they don’t disclose commissions.

Should I close my PSC?

If it’s looking likely that you’ll have to accept a contract via PAYE / umbrella, you’ll need to consider what to do with your PSC. When it comes to closing a limited company, there are a few things you need to consider:

  • Time – it can take at least 6 months to close a limited company
  • Cost – you’ll likely need to pay an accountant to close your company, or if your company’s assets are over £25k, you’ll need to use a liquidator
  • Difficult to start up again – in April 2016, HMRC introduced a new “targeted anti-avoidance rule”, which means if you restart contracting with a new limited company within two years of closing your last company, HMRC may investigate you

Closing your PSC is not a straightforward choice. If you think you’ll always be inside IR35, or are planning on leaving the contracting market altogether, then closing is the right choice. 

However, if you’re planning to continue contracting, and are confident you’ll work outside IR35 in the short to medium term, keeping your company operating will be a better bet.

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