IR35. Two letters and two numbers that strike fear into the hearts of freelancers everywhere (our survey confirmed it). But should they? There’s a couple of key distinctions to make first.
The ins and outs of IR35
Ultimately, your IR35 status comes down to one simple determination: are you inside or are you outside? If you’re found to be inside then you’ve fallen foul of the legislation, are seen as a ‘disguised employee’ and will, therefore, be taxed as if you were a theoretical employee of your end client. In this case it would be a good idea to change the way you work. If you’re found to be outside, then you can carry on very much as you were.
Are you a sole trader?
Before we kick things off, it’s important to clarify one thing. If you’re a sole trader – and many of today’s modern freelancers are – then have no fear. Sole traders are exempt from IR35 legislation, but single-individuals working through their own limited company are not (also called ‘Personal Service Companies’, or PSCs).
Ok, so you’re a PSC?
If you’re working through a PSC and are still not sure which side of the line you fall on, we’ve put together a few quick pointers to guide you below. In summary, HMRC are looking for evidence that you are operating as a genuine business – making decisions as a business would and taking on all the potential risks (and rewards!).
You’re outside IR35 if most of the following apply;
- You can send a ‘substitute’ to work in your place. Substitution is a key part of determining IR35 status. This shows the end client has a contract with a business and not just you!
- Your client doesn’t have control over how you work. If you can work where and when you want, and are not beholden to the commands of whoever you’re working for, then it’s likely you’re outside IR35.
- There is no ‘mutuality of obligation’ with your client. Once the project is finished, you can move on. There is no obligation for you to accept further work from your client and no obligation for them to offer further work to you
- You are taking a financial risk. With your own assets – and a dependence on your client to pay you – you are risking financial loss when you work. A ‘regular’ employee wouldn’t have to shoulder this burden
- You use your own equipment. You are not required to use equipment offered or provided by your client (unless for safety and security reasons)
- You can terminate the contract when you wish (subject to terms, of course). Unlike an employee, you don’t have a notice period
- You don’t have employee benefits. Obviously a bit of a sore subject, but in this instance a lack of holiday pay, sick pay is actually beneficial – it’s a key indicator for being outside IR35
- You work for more than one client at the same time. Genuine freelancers will often be working on several jobs at once
- You carry out work for a fixed fee, and are paid at the end of a contract
- You don’t work for the same client for a long time. If you do have only one client, it’s more likely you’ll be found outside IR35 if that contract is relatively short term
- You’re constantly moving from job to job. Staying active shows that you’re not tied down to one client or place
- You’ve got freelancer insurance in place. Holding the proper insurance will give HMRC a clear indicator of your freelancer status, showing that you’re aware of potential claims that could be made against you
As a final takeaway, we’d simply say: don’t let worries about IR35 overwhelm you. The benefits of being self-employed are far above and beyond the financial. It can be easy to get caught up in the hysteria, but it’s just as simple to take a step back and realise how great it can be when you work for yourself.
And if you’re looking for freelance insurance, we know a good place to start.