Maybe you’re the type of freelancer who dutifully checks the FT each morning to see if there’s any news that might affect the self-employed. Or maybe you’re the type of freelancer who would genuinely rather undergo a particularly grizzly Bushtucker-trial style scorpion encounter than click on the “business” section.
If you’re in the first category, you may have noticed that the controversial IR35 tax reforms have just been introduced this month. But what is IR35 – and do freelancers need to be worried about it? In this blog we break down the basics of IR35, tell you how to find out if it applies to you and your business, and what your action plan should be if it does. No scorpions involved; we promise.
What is IR35?
IR35 is the generic name given to a set of laws governing “off-payroll working”. Basically, it’s trying to stop people from claiming they are self-employed business owners (and enjoying the tax benefits that come with that) when they are actually acting more as employees of a client. IR35 has been around in one form or another for over 20 years, and the current set of rules have already been active in the public sector since 2017. The recent legislation is designed to bring the private sector into line with this. In the new setup, each contract or job a worker undertakes must be assessed by their end-client to see if it falls inside or outside IR35:
- If a self-employed worker is found to be outside IR35, they are seen as ‘genuinely self-employed’ and remain responsible for their own taxes.
- If a self-employed worker is found to be inside IR35, they will have to pay income tax and National Insurance on the contract as they would if they were an employee, which will be deducted at source from their fee-payer.
Does IR35 apply to freelancers?
The good news is for the vast majority of freelancers, IR35 shouldn’t be an issue. IR35 is only relevant if you work through your own limited company or intermediary, sometimes called a personal services company (PSC). This tends to apply mostly to more traditional “contractor” type workers, working longer-term contracts for single clients. It doesn’t apply to sole traders, so if your business is registered as a sole trader, you can skip happily off to the end of the blog. For those that do work through a limited company, you should be aware of IR35, understand your responsibilities and rights under the new scheme and, if you want to continue working as a freelancer, understand how to make sure you’re “outside” IR35.
What if IR35 does apply to me?
If you work through your own limited company and are engaging with medium and/or large size private sector clients, or public sector clients, they will take on the responsibility for assessing whether your contract with them is “inside” or “outside” IR35. For clients who are deemed as a small business, you can continue to assess your own status in the normal way. You may need to ask your clients to confirm their size so that you know which rules apply.
Each contract should be assessed individually, and it may be that you are “inside” for some of your work and “outside” for other jobs. The important thing to know is that you now need a status determination statement (SDS) for each contract that you’re working on, whether it’s new business or ongoing work. The client should produce this SDS, and it should detail their assessment of your status, including the reasons for coming to that decision. Clients have a legal responsibility to take “reasonable care” when producing these, so they shouldn’t be making blanket decisions (e.g. declaring all PSCs to be inside IR35). The status determination must be passed to you as the worker and along to any intermediaries in the employment chain, like recruitment agencies, until it reaches the fee-payer who will then hold the liability to deduct the appropriate taxes if you are deemed inside. If you disagree with the client’s decision on your status, you have the right to dispute it, with reasons and evidence, and they must respond within 45 days.
How do I know if I’m inside or outside?
If you’re engaged in genuine self-employment, running your own business and working on a project basis for multiple clients, you are likely operating outside IR35 – though, of course, it’s not always that straightforward.
There are a number of things that a tribunal would look at to determine the true status of a contract. An investigation would take into account both what is written in the contract and the actual working practices of your engagement with a client. There are three key tests that are often talked about in relation to IR35:
- Supervision, direction, and control: Your client shouldn’t have control over when, how and where you do your work. You shouldn’t be “managed”, appraised, or closely watched in your role, and you shouldn’t accept training or skills development from a client.
- Right of substitution: can you ask someone else to do the work in your place? It’s a good idea to have a substitution clause in your contract in case of illness or emergency.
- Mutuality of obligation: your client shouldn’t be under any obligation to offer you work, and you shouldn’t be obligated to accept it. The relationship shouldn’t be exclusive, and you should be free to work for other clients.
Beyond these, there are other indicators of self-employment that it’s good to keep an eye on, including:
- Equipment: where possible, always use your own equipment, not the client’s (there may be exceptions to this rule on safety grounds).
- Payment: it’s expected that someone who is self-employed will invoice for each piece of work/project once complete, or at set milestones. Try to avoid interval-type payments that look like a salary.
- Location: are you required to work out of the client’s offices, or can you choose where you work?
- Organisational involvement: you should remain separate from the client’s company – this might mean not taking on supervisory or management responsibilities for staff, being clearly identified as a contractor, and not being integrated into the company organisationally.
- Employee-type benefits: don’t accept benefits like holiday pay, sick pay or pension contributions from a client.
- Business in your own account: anything that shows that you are a business in your own right is useful for demonstrating that you’re a separate entity to your client. This might be things like running an office, having your own website, invoicing, or having a logo and business stationery.
It’s good practice to work in these ways anyway, for all freelancers, even if you don’t work through an intermediary company. One way of demonstrating that you’re a business in your own right is to hold separate business insurance. This shows that you understand that your client’s professional indemnity and public liability policies will not offer you cover, because you’re not acting as an employee of that business. If you need specialist business insurance for freelancers, Dinghy offers flexible cover that you can pay for monthly with no extra fees or charges. Visit our website for a quick quote.