This week, it’s time for every freelancer’s favourite topic – tax news update! The beginning of the new tax year is almost upon us and apart from it being time to get your accounts in order once again, it also means the end of HMRC’s promised “soft-landing” period for IR35 rules. But what does this mean if you’re a freelancer? In this blog, we’ll give you a quick rundown of what IR35 is, help you understand if it applies to you, and offer some support and advice on next steps if you think your work might fall under the rules.
What is IR35?
You might sometimes hear IR35 referred to as “off-payroll working” rules. Basically it’s the government’s way of trying to avoid what it calls “disguised employment”. This is when self-employed contractors offer their services through an intermediary company in order to take advantage of preferential tax rates, but actually in their working arrangements and contract they are treated more like a direct employee. According to HMRC, IR35 rules have been put in place to make sure that “workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as employees”.
A job might be considered “inside” IR35 if you have to do things like: work set hours at your client’s premises; use your client’s equipment not your own; have holiday approved by a manager; take employee benefits like a company pension; or have any sort of supervision requirement. IR35 legislation is quite complex and there can be many different factors that make a contract inside or outside IR35. You might even have seen in the press stories about big names like Lorraine Kelly and Gary Lineker having to defend themselves against accusations of breaches of IR35 rules for work in the public sector (where the legislation has been active a lot longer).
What is the soft-landing?
HMRC promised a ‘soft-landing’ to IR35 for the first year. This means that they promised not to impose any penalties on any infringements of the legislation during this period, unless there was evidence of “deliberate non-compliance”. Businesses would, however, still be liable for any unpaid tax and National Insurance. The idea was that contractors, recruiters and end clients had a year to get used to following IR35 processes and iron out any problems or mistakes. The legislation came into force for the private sector on the 6th April 2021, so this officially ends next week. HMRC may be a lot more heavy-handed going forward in making sure people are complying with the rules.
Does IR35 apply to freelancers?
Generally, no – but it does depend on how your business is set up and how you work with clients. If you are freelancing as a sole-trader or partnership, there’s no need to worry. If you freelance through your own limited company or other entity, then you should definitely investigate further whether the rules apply to you. There’s a bit more information in this blog, or if you’re a Dinghy customer and you need support then give our free tax helpline a ring through your Freelancer Assist service. They’ll be able to go through some questions with you to find out if the rules do apply to you, and advise on what steps you need to take to make sure your freelancing is compliant with the new rules.
What if IR35 does apply to me?
If IR35 does apply to you, then you’ll need to do some research and get up to speed with the new rules – as quickly as possible! Ensure you are doing everything you need to. This might include things like:
- Updating your contract(s) to ensure that it’s clear that you are offering your services as a business in your own right and that you have control over your work.
- Examining your working practices and relationships with clients to make sure that you’re not working in a way that could be described as “disguised employment”.
- Calculating what tax and National Insurance you might owe for any work that might be considered inside IR35.
- Learning what a Status Determination Statement is, who needs to create one, and what you need to do with it!
- Coming up with a system to monitor and evidence your compliance with the rules in case of an investigation.
Get business insurance sorted
One of the ways in which IR35 has historically been assessed as cases have gone through the courts is whether contractors and freelancers can demonstrate that they are “in business on their own account”. This means – is your limited company set up as a genuine business and operating as a business, not just a front? Indicators of this might include: your own website, office, having multiple clients, branded stationery and, of course, your own separate business insurance. This shows that you recognise that it’s not your client’s responsibility to cover mistakes and accidents made in the course of your work, because you’re a legally separate entity.
Therefore, if you haven’t already, making sure that you have business insurance that covers you can provide another one of these vital indicators. Dinghy can insure your freelancing business with one of our flexible policies built with freelance life in mind – just head to our website for a quote in seconds, straight to your inbox.