Freelancers – get IR35 savvy
If you’re a freelancer or a contractor, you’ve probably come across IR35 before, either in conversations with your accountants or in your dealings with clients and / or HMRC.
If you’re new to freelancing or are contemplating it with serious intent, you’ll be hearing terms like ‘disguised employee’, ‘caught by’ and ’ ‘outside IR35’ very soon.
Because in April 2020, there’ll be a slight, but significant, change to the tax law known as IR35.
IR35 – what is it?
Towards the end of the 1990s as freelancing really started to grow, the government discerned a worrying trend. People were leaving their jobs, setting themselves up as limited companies and then returning to their ex-employer – and their newly-vacated role. As external suppliers now working through personal services companies (PSCs, aka limited companies) they would pay less tax. This is because as the owner and shareholder of a limited company you can pay yourself a salary low enough to fall below the tax threshold and top up your income by way of shareholder dividends. You pay less tax and lower National Insurance contributions (NICs) on dividends than you do on PAYE salaries.
Hence the term ‘disguised employee’. Unimpressed, the government of the day introduced IR35.
Currently, it’s the contractor who declares whether their contracts fall inside or outside IR35.
That’s about to change
In April 2020, any medium or large business that hires ‘off payroll’ talent must make the IR35 assessment. Where the end hirer deems a contract to be inside IR35, tax and NIC deductions need be taken at source, either through a PAYE function or at source from the contractors day rate by the fee payer. VAT isn’t affected.
Where the hirer deems the contract outside IR35, the freelancer can continue to pay themselves via their limited company as a shareholder without tax being taken at source.
Some ‘small’ companies will be exempt from the responsibility to assess IR35 if they meet two of these three criteria:
- their annual turnover is not more than £10.2 million
- their balance sheet is not higher than £5.1 million
- they employ no more than 50 people
However, a client being exempt from assessing the contract doesn’t necessarily let you off the IR35 hook. If you work for such a client, you’ll need to make your own assessment and declare, to the best of your knowledge, whether or not the work fell inside or outside IR35 on your tax return.
It’s not about you – it’s about your contracts
Remember, individuals and their PSCs are not the ones assessed for IR35. It’s about the contracts they enter into.
The Hokey Cokey
You may find some of your contracts fall inside IR35, while other assignments are outside. This is why it’s still vital that you fully understand your options and can operate inside and outside when you wish.
Depending on the process the end hirer puts in place for IR35 assessment, you also may be asked questions about how you’ll fulfil your role. And your answers could influence the IR35 outcome.
To help you with this, there’s a tool on the HMRC website called CEST (Check employment status for tax). This will ask you about things such as:
- who decides what work you’ll be doing
- who decides when, how and where you’ll do it
- how you’ll get paid
- whose equipment you’ll use to do the work
- whether you can claim expenses (such as travel) from the hiring company or receive any additional benefits.
Between now and April 2020
Now is a good time to take a good look at the types of contracts you’ve historically worked on in the context of IR35. If you’re a limited company, consider what percentage of your ongoing freelance contracts are likely to fall inside IR35 with the applicable tax and NI deductions. To help you with this:
- take the CEST test. Evaluate your current working arrangements and ask yourself if you’d place them inside or outside IR35. If possible, model the financial impact and decide if you’re happy with the outcome (simplified tax return vs lower tax liability?). Note – being taxed as an employee won’t entitle you to employee rights such as paid holiday, sick leave, pension enrolment, etc.
- position yourself. If you want to avoid IR35, you’ll need to position yourself as a ‘business’, with all that entails. Doing the work at your own premises, having business insurance, being able to provide someone to do it instead of you personally, using your own equipment, having your own website etc, are all clear indicators that you’re not disguising yourself as an employee
- be flexible. If a client insists on you being at their office during agreed hours and using their IT systems, etc, you may have to decide between accepting the IR35 liability or losing the gig. So get yourself set up with a payroll provider for contracts that fall inside IR35. Most reputable umbrella companies offer flexible products that allow you to flip into a payroll solution when required and packages to manage your limited company accounts, too
- always read the small print. Assume that from 2020, all new contracts will have been assessed by the end hirer for IR35. Read the contract offer carefully and be aware of your tax liability
- take advice if you’re not sure. Despite CEST and factors that make an assessment look simple at first glance, there are still some grey areas around IR35. If you’re unsure about your tax position or any aspect of IR35, speak to HMRC, your accountant or us
At The Industry Club, we’re working with our clients to help them understand the status of their contracts post April 2020. We also have a roster of payroll providers who can help you get ready for any contracts caught by IR35.
It’s not long now till April 2020, so let’s get you ready in good time. Email us at email@example.com with any queries you may have.