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If you’re a freelancer in the UK, you’ll be needing to understand whether you fall under the scope of the new IR35 regulations or not. Here is a detailed IR35 Guide for Freelancers.
What’s IR35?
A good place to start is to check out why the government has put the new regulations in place. As of April 6, 2021, IR35 came into action to help stop ‘disguised employees’. In a nutshell, the gig economy has created plenty of workers that enjoy all the benefits and perks of an employee but are classified as self-employed, and HMRC wants it to stop.
IR35 rules now apply to ‘medium or large’ sized businesses in the private sector and all organizations in the public sector. There’s an exemption for ‘small businesses.
How to determine your IR35 status as a freelancer
The government has put out a toolkit to help you determine your status. However, this is not as clear-cut as it sounds and you’ll need to examine your client contracts to ascertain if you fall inside or outside IR35 as a freelancer.
Confusingly, freelancers are no longer responsible for assessing their project’s IR35 status. It’s now the end client that is responsible for determining whether an assignment is inside or outside of IR35 rules. However, it’s in your best interests to make sure you are clearly self-employed and remaining IR35 compliant so it’s best to know your contracts inside out before you sign.
You’ll want to point a discerning eye at the details of your contract to assess the following:
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- Your responsibilities
- Who decides what work needs doing
- Who decides when, where, and how the work is done
- How you will be paid
Inside or Outside IR35?
In essence, inside IR35 means the client pays Income Tax and NICs (employers and employees) to HMRC. It also means the freelancer does not receive any benefits that an employee would have access to. The client must make this decision before engaging a freelancer and then fill in a Status Determination Statement (SDS). They must then provide the SDS in writing to the freelancer before the assignment begins.
However, if a client is based overseas and doesn’t have any UK offices, the new rules do not apply.
If you are chosen for an IR35 inquiry
If HMRC decides to investigate you, you will first receive an opening letter to which you will need to respond with a breakdown of your income, expenses, contracts, and an explanation of why these contracts should be outside IR35. After that, if you haven’t provided sufficient proof, you may be called for a meeting with HMRC compliance to provide more information. However, you can request the inquiry continues by post rather than face-to-face.
Generally, the inquiry will focus on one specific tax year. And after HMRC has gone through all the evidence, they will make a decision. You may appeal if they determine you are insider IR35, however, there are costs involved.
How to be outside IR35
Here are some tips to making sure you stay on the right freelancer side of IR35:
- keep your records of work and contracts up to date and well filed
- don’t take on a job where you are replacing an employee
- do your tax returns on time
Freelancers providing services will always be susceptible to accidentally falling outside the new IR35 regulations. Keeping thorough records, reading through your contracts carefully before you sign on, and keeping under the radar of HMRC, as all sound ways to ensure compliance.
Important to note
Notably, freelancers and contractors do not have to pay penalties for errors relating to off-payroll assignments for the first year. Additionally, the new rules will only apply to services carried out from 6 April 2021.
You can also check out our IR35 checklist to make sure you have everything in order.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.
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