Understanding IR35 (off-payroll working)

What is IR35 and how is this changing?

IR35 applies to contractors, including freelancers, working in the public and private sectors, where they are operating as, or being treated as, a permanent employee. If you do not fall under HMRCs definition of self employment, then it most likely affects you and the way you are taxed. Here’s a quick rundown on what it means for you.

In a nutshell, IR35 is a set of payroll laws set up to make sure that workers who provide services through an intermediary (usually the worker’s own personal service company) and who would have been employees if they were providing their services directly to the client, pay roughly the same tax and contributions as if they were direct employees of their client.

If you’re a freelance contractor working for a medium/large sized private sector client, from April 2021 your client will get to decide your employment status and can choose to declare you as a ‘disguised employee’, which means you would fall under IR35.  

Making this declaration means HMRC recognises contractors the same as they would a permanent employee and the relevant checks are applied to your tax and contributions and the fee payer is then responsible for deducting income tax and National Insurance Contributions.

How do I know if IR35 applies to me?

If you provide your services to a client though an intermediary (aka your company) but get all the benefits of being a permanent employee (see the list below), then you would fall under the IR35 tax rule. You can use the CEST (Check employment status for tax) tool to help figure out if these rules apply to you. As well as CEST, there are other professional services that can help you figure out if you fall within IR35.

HMRC will also look into the relationship that you have with your client. Basically, they’re checking to see if the contract you have lines up with the relationship you have. If your contract is compliant with IR35 but they find out you’re treated like a permanent employee, that could lead to your contract being worthless.

A few more things to consider:

• If you’re not allowed to provide a substitute (aka someone else to do your work) that means you fall inside IR35
• If the contract type you have is rolling, then you’ll fall inside IR35
• If the work you’re assigned is given a ‘how, when and where’ then you fall inside IR35

Key dates – the who and when of IR35^[1]

Before April 2021, if your client is in the public sector, it’s their responsibility to decide on your employment status. However, if your client is in the private sector, then it’s currently the job of your intermediary to decide on your employment status.

In April 2021 the rules will change. All public sector authorities, as well as medium and large sized private sector clients will be responsible for determining if the rules apply.

However, if you provide services to a small client in the private sector, then your intermediary (in most instances, you) can continue to decide.

To clarify what a small company would be considered as, they must meet at least two of these three qualifying conditions:

• Turnover of £10.2m or less
• £5.1m or less on its balance sheet
• 50 employees or less

How do I know if I’m excluded from IR35?

There are a few things that may indicate that a worker may fall outside of IR35:

• Equipment: If someone uses their own equipment (e.g. a computer) and works remotely then most likely they will fall outside of IR35. If they were an employee of a company, a computer would be provided
• Benefits: Holiday, pensions, maternity/sick pay. These things will usually only be applied to permanent employees and not contractors
• Funding: If a worker finances their own project then it’s clear they are self-employed. If they weren’t, the company would be financing it for them
• Relationships: As a contractor, you should distance yourself from the corporate structure of a company. The only responsibilities that should be considered are, for example, safety instructions
• Contract ending: The contract should state that it will be terminated at the end of the project (or a breach of contract)

If you have not already done so, to prepare for the IR35 changes it’s essential that you find out as soon as possible whether your work falls inside or outside of IR35. Speak to your accountant (if you have one) and they should be able to provide guidance on what you need to do, or visit the HMRC website. Organisations like IPSE also hold the key to a wealth of knowledge around freelancing and small business and they may be able to offer some useful advice as well.

HMRC published a minor amendment to IR35 on the 7th February 2020^[2]. Previously, it was stated that the rules would be applied on any payments made on or after 6th April 2020 regardless of when the services were carried out. It was then changed to only apply to services provided on or after 6th April 2020. However, after the outbreak of Coronavirus (Covid-19), the government decided to push it back a year to April 2021.

Whether you fall inside or outside IR35, it’s a timely reminder to review your contracts. Keeping track of your records and maintaining your financial audit trail are key to staying on top of your tax obligations and the rules that apply to you.

Sources

[1] https://www.gov.uk/guidance/understanding-off-payroll-working-ir35

[2] https://www.gov.uk/government/news/hmrc-announces-change-to-the-off-payroll-working-rules 

This content was created on 10th March 2020