The big question
Life is full of big questions. Is free will an illusion? How do we define consciousness? How many steps do I really need to take in a day? Is my collapsible coffee cup really saving the planet – or just aiding Starbucks’ profitability? What exactly is IR35?
We can’t help much with the first few, but we can certainly have a go at the last one.
Anyone with even half a foot in the freelancing door will likely, at some point, have heard about IR35. You’ve probably all asked the same questions. Am I IR35? Or, more accurately, am I inside IR35 or outside IR35? How do I know whether I am inside IR35 or outside IR35? Is there an IR35 test? How do I avoid IR35?
Sole II Sole
We’re going to shine a light on a few of those shortly. And we’ll try not to say ‘IR35’ quite so much.
But before we do, there’s a key point worth raising. Most of the coverage you’ll find around IR35 focuses on the impact it’ll have on a more traditional, dyed-in-the-wool type of contractor. You know – works on one job at a time. Carries out their role in the same place of work as a ‘traditional’ employee. Client is often a big multinational. That kind of thing.
However, the ongoing self-employment surge is happening in large part due to the growth of an altogether more evolved type of worker. Today’s freelancer is a multi-faceted nomad, comfortable working across different briefs and often for different companies at the same time. They’re itinerant in the best sense of the word. And, crucially, more often than not they’re a sole trader.
Why does that matter? Because sole traders are excluded from IR35. The legislation doesn’t apply. It’s as clean cut as that. So, if you’re a sole trader, you can relax. Put the kettle on. Grab a Custard Cream from the tin and enjoy the rest of this blog. That said, there are aspects around supervision, direction and control that sole traders need to be cognisant of. (But we’ll save that for another day)
However, if you’re registered as a Personal Service Company (PSC) – i.e. your own one-person limited company – then IR35 is something you need to be aware of. Let’s take a look at the basics.
In or out?
In the simplest of terms, if you’re ‘inside IR35’ it means you’re considered to be a ‘disguised employee’ – i.e. you should just be an employee of your end client and taxed like one. You’re probably paid hourly, weekly, or monthly. Your working hours are decided by someone else. You can be told what tasks you’re working on, where you’re working, and how you should work.
If you’re ‘outside IR35’, then you clearly and definably work for yourself as a genuine business. Normally you carry out your work for a fixed fee. You’re paid at the end of a project. You work for a number of different clients. You control how, when, and where you do your work. You could be paid hourly, weekly or monthly – but you must have control over how you work.
Of course, how finely you tread that line between inside and outside depends, to an extent, on the work you do. Freelancing has changed the world of work as we know it, but even within that there are nuances. Today’s freelancer – even when registered as a PSC – is a different creature to the long-term contractor working as a specialist within one sector of one particular industry.
You might be a software developer. You could be a translator. Perhaps you work in the gig economy, at a time and a place that suits you best. Maybe you even do it all.
In fact, it’s that inherent flexibility, that natural, comfortable ability to be agile, that can determine your IR35 status more clearly than almost anything else – even if you’re registered as a PSC. If you’re working for multiple clients on a regular basis – moving from job to job at a pace that suits you – then it automatically becomes quite clear that you are genuinely self-employed.
However, if you’re working for the same client, at their place of work, and for a long period of time it’s easy for the lines between ‘employee’ and ‘freelancer’ to become blurred.
It’s widely agreed that are three main factors in play when it comes to determining IR35 status:
- Substitution: Is there a requirement that you carry out the work yourself, or can you send someone else (a ‘substitute’) to complete a project if you are unable to? An employee is unable to send a substitute. A PSC can.
- Control: An employee is beholden to the commands of their employer. They are told how to work, where to work, and when. A true PSC freelancer will be under the control of their client to a much lesser degree – if at all.
- Mutuality of Obligation (MOO): If your client is obliged to offer you further work after your project is completed, and if you’re obliged to accept that offer, then you’re very likely to be seen as employee. As a PSC, the decision should be entirely yours.
To avoid IR35, you’ll need to be able to show that at least one (and ideally more) of these three factors don’t apply to your contract. If you can’t, then may well find yourself on sticky ground.
The key points
As helpful as it can be to read a blog post like this one on the impact IR35 might have on PSC freelancers, sometimes there’s nothing better than displaying all the salient information in a logical, linear fashion. A list; in other words. So that’s what we’ve done. Think of it like SparkNotes: IR35 edition. The good bits. Essentials only.
- Stay busy. Work as many jobs as you want at the same time
- Stay active. Move from job to job whenever suits you
- Read your contract carefully. If you’re in doubt, get in checked by a professional
- Do your research. If you’re not sure about IR35, read around. Ask your fellow freelancers. Don’t be afraid to ask questions
- Sole traders are excluded from IR35. Limited companies are not
- There are a number of benchmarks for determining
- Control: Are you free to work as you wish? Or are you required to work at a certain place or certain time at the command of your client?
- Financial risk: A ‘regular’ employee would not risk financial loss by being employed. A freelancer – with their own assets, dependent on the client to pay them – definitely would
- Substitution: Does the contract contain a clause allowing you to substitute in a replacement if you can’t complete the job? If you’re a PSC freelancer, it should
- Equipment: In general, a freelancer will be using their own equipment (unless security measures put in place by the client prohibit it)
- Dismissal: Employees will generally have to work a notice period. In a freelance contract, the client should be able to terminate the agreement immediately if they choose to do so (subject to the terms of the contract of course)
- Obligation: A lack of mutual obligation means you’re in the clear. However, if your client must offer you work – and if you must accept it – then, to HMRC at least, you’ll look an awful lot like an employee
- Employee benefits: Holiday pay, sick pay, pension contributions. Employees are entitled to these, but freelancers working for the client are not (sorry!).
To put it simply, there should be a clear line in the sand at the start of any job you undertake – a set of stipulations which clearly define you as the freelancer that you are. With these rules in place, you can get to work safe in the knowledge that you’re firmly and resolutely outside IR35.
“Don’t panic, don’t panic”
Calm down, Jones!
If there’s one hard and fast rule, it’s this one: don’t panic over IR35 if you’re a PSC. There are lots of benefits of working as a PSC – and they’re not just financial. Not only is it a plus from a reputational perspective but – by definition – it limits liability if something does go terribly wrong. Oh, and one more thing. Having insurance is not only a jolly good idea but as a PSC it’s another sign that you’re operating as your own business – essential if you want to remain outside IR35.