IR35 – A Guide for Freelancers
“IR35.” You’ve probably heard of it. You’ve probably read a bit about it. But even if you’re a freelancer who may be affected by it you might not yet know whether you need to do anything at all. So here’s our guide to IR35 for freelancers.
What is IR35? (In Plain English)
“IR35” is the term used to describe a couple of bits of legislation. These are:
- The Intermediaries Legislation (Chapter 8 of ITEPA) which was introduced in April 2000
- Off-Payroll tax rules (Chapter 10 of ITEPA) which was introduced to the public sector in April 2017 and will apply to the private sector from April 2020
IR35 is designed to prevent freelancers/contractors and those companies they work for (who we’ll refer to as the ‘client’) from avoiding tax or paying less tax.
So here’s the situation these pieces of legislation are trying to avoid. Let’s say a contractor sets up a Limited Company and then sells their own services through this company. They’re self employed, right? So the client hiring this contractor does not deduct tax or National Insurance. Instead, the contractor’s company raises an invoice which the client pays.
As someone who is self employed, the contractor has some relatively modest tax savings then compared with paying standard income tax and National Insurance as an employee.
Now, if this contractor is working for multiple clients offering services to several different organisations, this would generally be deemed absolutely fine. But where it becomes an issue is where the contractor really only works for the one client.
Essentially, it is deemed this person is behaving like an employee – but by using an intermediary (their own company in this example) is paying less tax.
Similarly, companies often benefit too because, for example, they don’t have to pay employer’s National Insurance or offer paid leave and so on.
IR35 encompasses regulations designed to stop that happening.
And What’s ‘Off Payroll Tax’?
Off Payroll Tax is something HMRC pitches as something of a reform to IR35. But actually, this represents completely new legislation. The major changes against the original legislation comprise of the following:
- The client has a responsibility for determining the contractor’s status and whether they would be considered an employee under IR35 regulation
- The fee payer (the individual responsible for hiring and paying contractors) is liable for determining, reporting and handling tax by means of Pay As You Earn (PAYE) on all payments made to those who are classed as being employed for tax purposes.
- The fee payer will also be responsible for employer’s National Insurance Contributions at a rate of 13.8% as well as the Apprenticeship Levy (at 0.5%), alongside the fees paid to the contractor. They will be liable for the risk of any challenge of status made by HMRC.
- If the fee payer can’t prove that they have taken ‘reasonable care’ in assessing a freelancer’s status, then they are responsible for taking the position of the fee payer.
It’s also important to bear in mind that small businesses in the UK will be excempt as a result of the small business exemption, which will apply to companies who meet this criteria.
Is It New?
Short answer – no.
The first piece of legislation goes back to 2000, when it was created by the government to ensure that all individuals who work in a similar way are treated fairly. The Off Payroll Tax regulation was then reformed and introduced for the public sector in 2017. This was to ensure that organisations in the public sector who work with contractors were making sure that both themselves and their workers were paying the correct amount of tax.
These regulations will also begin to apply to those who work in the private sector as of 6th April 2020, however, as mentioned above these regulations will only apply to medium, large and third sector organisations.
What is My IR35 Status?
Everyone knows it’s always a good idea to stay in HMRC’s good books. Therefore as a freelancer, it’s important that you know where you stand with regards to the IR35 regulation.
This regulation only applies to contractors or freelancers who HMRC deem to be ‘Disguised Employees’. You’re unlikely* to be affected by IR35 if the following factors apply to you:
- You control your own working hours and conditions
- Your work could be completed by someone else (it doesn’t have to be you)
- You’re taking a financial risk by doing (or not doing) the work you do
- You are not given any benefits such as bonuses or holidays
- There is no expectation or obligation for your client to offer you work
- You do not play an integral role in your client’s organisation, they could work without you.
- Your client does not provide the equipment you use
There are no ‘set in stone’ rules that HMRC use to determine whether or not an individual should be affected by IR35. However, the above factors are likely to be taken into consideration when HMRC assess your status.
What should you do if you think you’re affected?
If you think that you are affected by the IR35 legislation, double check with an accountant to make sure that this is definitely the case. It will then be advisable to get into a standard employment contract with your client as soon as you can.
Your accountant should then be able to advise you with regards to any future tax, National Insurance Contributions and penalties HMRC are likely to demand.
If you’re unsure about whether or not you’ll be affected by IR35 – or you think you might be but don’t know what to do – we highly recommend consulting a tax lawyer or accountant as soon as possible.
We hope this article has helped you to understand exactly what IR35 is and how it may affect you as a freelancer or contractor.