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If you are a freelancer, contractor, consultant, in any way self-employed, or are hiring those who are, you’re going to need to know everything you can about IR35.
Here is our complete IR35 guide including exactly what it is, who it affects, whether you fall inside or outside of it, and a checklist to ensure you comply.
What is IR35?
In a nutshell, the new off-payroll IR35 rules is a set of tax laws that form part of the Finance Act in the UK. After a year’s delay due to Covid-19, the regulations took effect on April 21st, 2021.
So, what have they changed the rules for? Well, the new IR35 rules were created to distinguish employees “disguised” as individual contractors for tax purposes. In recent times, the gig economy has contributed to an explosion in contract employment where an individual engages with a business, often through a third party, such as a personal service company (PSC). And thus receives tax benefits they otherwise wouldn’t if they were an employee.
Previously, it was the role of the PSC to determine whether the individual falls inside, or outside the IR35 regulations to pay any increased tax. Now, the business that engages the contractor needs to make this assessment.
Inside IR35
Specifically, when you are inside IR35, you pay the same national insurance and tax as a permanent employee. You should have the correct PAYE deductions as a regular employee taken from your salary. Also, your employer/client will match your national insurance contributions to the government.
Quite simply, being ‘inside IR35’ means you are paying tax appropriately for your role as an employee. If your role changes, you will need to reassess your status.
Outside IR35
Generally, being outside IR35 means you are a legitimate contractor receiving a salary from your limited company.
Contrary to an employee, it’s your responsibility to pay the correct national insurance and taxes on the funds resulting from your work. Additionally, you are not subject to PAYE from your contract client. However, you may still be subject to an enquiry from HMRC.
Who does IR35 affect?
The new rules have implications for businesses across all sectors but the government maintains that it will not affect genuinely self-employed individuals.
Contractors that work through their own limited company don’t get benefits such as holiday leave or sick pay. Instead, they benefit from tax efficiencies. However, sometimes contractors use this tax efficiency while also receiving employee benefits. HMRC amended the off-payroll working rules to stop this from happening. Now contractors, who would have been an employee if they were providing services directly to clients, pay the same tax and National Insurance contributions as employees.
For example, a contractor working onsite for a rolling contract using a specialised computer provided by the client and being paid monthly wages would likely be inside IR35. This is especially true if they need to clear a holiday with the client.
Another example is a contractor working from home, on their own laptop, for a four-month contract with a fixed payment for the work. That would usually fall outside IR35.
While an IT contractor working for a firm on a one-off project which is due to take three months, using their own equipment, working from home, and being paid a fixed amount for that work, would usually be seen as outside IR35.
These changes were set to take effect in 2020 but were put on hold during the initial COVID-19 pandemic. They officially came into play in April 2021.
Determining IR35
Again, the assessment obligation will sit with the business that engages the contractor. Should contractors be treated as employees for tax purposes, the client will then be responsible for the tax burden.
HMRC will take a view of the whole situation and how it works in real life, rather than just how the contract appears on paper. But these are the principles:
- Substitution: Does the contractor have to carry out the work personally, rather than being able to send a substitute?
- Mutuality of obligation: Does the client have to provide the contractor with work, and/or does the contractor have to carry out any work that the client requests?
- Control: Does the client have control over how, when, and where the contractor carries out the work?
If the answers are yes to these questions, this will indicate a quasi-employment relationship, which falls under IR35.
HMRC has a tool for employers called the Check Employment Status for Tax which was introduced with the reforms to IR35 in 2017. This can help to determine whether someone working falls inside IR35 or not.
How to hire contractors in compliance with IR35
Here are some strategies to make sure your contractors are legitimately outside IR35:
- Communication is key. It is in both parties’ interests for tax and employment status to be confirmed well ahead of major legislative change or a status enquiry from HMRC. Start by having a compliant written contract. But the true relationship between contractor and client will always supersede any written terms.
- For individual freelancers or contractors, you should collect evidence to show you belong outside IR35. Gather emails, supporting documents or agreements from a client reflecting that you operate as a genuine business. Should your client suddenly decide you belong inside IR35, if and when reform lands, you’ll be in a stronger position to overturn the determination. Such evidence can include your company stationery, business cards, and website as well as anything else to suggest you operate as a business.
- The sheer complexity of IR35 means it’s not a bad idea to have your contract looked over by an independent party. A specialist can carry out an IR35 contract review of not only your written contract but your actual working arrangement too.
If you engage sub-contractors regularly, you can complete a Status Determination Statement (SDS) so you are clear about the employment status for tax purposes.
How to be outside IR35 as a freelancer, contractor, or consultant
So, how do you make sure you are outside IR35? Here are some strategies to put in place that will ensure you set yourself up as properly self-employed.
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No benefits
Benefits are for employees. If you’re a contractor, (and therefore outside IR35) you shouldn’t be getting private healthcare from your client. Also, you shouldn’t get paid holidays.
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No perks
That includes the free barista service, the office gym, creche, and anything else that is a built-in perk for employees. If you want to clearly keep yourself outside the limits of IR35, these workplace comforts are not for you. There’s no sick pay in the world of a freelancer. And pension contributions are out of the question.
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No internal comms
You’ll have to decline a company email or access to the Intranet where you’ve taken up a contract. This also includes frequently used comms apps like Slack, Flock, and Hangouts.
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Use your own stuff
This means you should be using your own equipment to do the job. Whether that is a computer or desk or any specialist gear.
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Have insurance
Professional indemnity insurance is considered essential for contractors, consultants and freelancers alike. As indemnity insurance covers your legal costs and compensation payments if your client takes legal action against you if you make a mistake on the service you provide. And, it’s a clear marker for HMRC that you are indeed self-employed.
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Start and finish
For a contractor, having deadlines and endpoints to your contracts is a part of the service that makes you a contractor. Your relationship with your clients should have projects with clear definition, goals and timelines. This includes a conclusion to the contract, rather than keeping it ongoing. To be outside IR35, you need to work on multiple projects simultaneously and have multiple sources of income.
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Flexibility
You may need to be on-site at times for meetings and project management reasons, but you should also be able to work from wherever you need to be and not subject to regular working hours like an employee is.
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Proper paperwork
Clauses in your contract should include no mutuality of obligation, rights of substitution, immediate dismissal, and control clauses. Your client should never have direct control over the way you provide your services. Your client does not need to provide you with work. You also do not need to say yes to the work you offer. Keeping your paperwork in order will help if you do have to undergo an HMRC investigation.
When you’re preparing your contracts, you’ll need to include the above clauses in your consultancy agreement, freelance agreement or supply of services contract with your clients. And then importantly, live by them as well. Otherwise, you could be viewed as an employee.
To Conclude
Make sure you know everything you need to know to comply with IR35’s new regulations. You do not want to find you’re operating on the wrong side of it and undergo an HMRC investigation with potentially enormous penalities. Best to sort your status, or that of your hires, right from the start.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.
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