In less than a month the new IR35 tax changes will come into force in the private sector meaning some freelancers and the businesses that engage them will have to pay tax differently. The new rules come into force from 6 April 2021 and will apply to services carried out from that date.
What is IR35?
IR35, also known as the ‘off-payroll working rules’, is designed to make sure that in an engagement, which is considered to be akin to an employment relationship, those working through their own companies, and their engagers (the clients), pay the same income tax and National Insurance contributions as those who are employed directly.
What is changing in the private sector?
Under the new IR35 reform, responsibility for determining the status of the freelancer will shift to the end client, where eligible, from 6 April 2021. This is already the case for all businesses and workers in the public sector, where changes were introduced in 2017.
Who does IR35 apply to?
Off-payroll working rules apply if a freelancer provides services to a client through an intermediary (usually their own company, in other words ‘a personal service company’), but would be classed as an employee for tax purposes if they were contracted directly.
If the rules apply and the freelancer is deemed to be inside IR35, tax and National Insurance contributions must be deducted by the end client from the freelancer’s fees and paid to HMRC.
IR35 applies on a contract by contract basis, so some contracts maybe inside IR35 and some maybe outside IR35.
The freelancer pays the same tax and National Insurance as they would if they were an employee. The end client will be required to pay the necessary tax and NIC.
Nothing changes. The freelancer is paid a flat fee as normal and is responsible for managing their own taxes.
Who decides the freelancer’s IR35 status?
Responsibility for determining status as inside or outside IR35 will lie with the end-client under the new legislation. This means the business using the freelancer’s services will be responsible for deciding their employment status.
However, if the freelancer is working with a ‘small company’ (turnover of £10.2m or less, balance sheet total of less than £5.1m and less than 50 employees) nothing changes – responsibility for checking their status vis a vis their end client remains with the freelancer (as it does now).
New rules will apply to parent companies, so larger businesses won’t be able to setup smaller companies to avoid paying contributions where a freelancer is deemed inside IR35.
Three tests to determine status
The way the freelancer’s status will be judged by the end client – and HMRC – will remain the same, namely the three key factors which determine employment status, or not, as follows:
• Who has control over how the work is completed?
• Who has control over the working hours or the location of where the work has to be done?
If the answer is the end client (the business engaging the freelancer) then the freelancer maybe inside IR35.
2. Mutuality of obligation
If the end client company is obliged to give the freelancer more work once they have finished a task or project, then they maybe inside IR35.
The freelancer contract should be specific about the work that will be carried out in the project, and it should not imply any automatic renewals of the services, nor should there be any expectation that they will continue to be paid if no work is available.
3. Personal Service
Does the freelancer personally have to complete the work that they have been engaged to do? To be outside of IR35 the freelancer needs to be able to demonstrate that their personal service is not a requirement of the engagement and ideally they have a genuine right to send a substitute.
Sole trader freelancers are not impacted by IR35
It is also important to bear in mind that IR35 only applies to individuals operating through their own limited companies. If the freelancer is a sole trader, the IR35 legislation will not have any impact. However, the end client will still have to decide on the employment status (employee, sole trader or a worker) in order to ensure it does not fall foul of the HMRC – and this has always been the case….
The way ahead
It is essential to remember that genuine freelancers and self-employed workers will not be affected.
Whilst limited company freelancers (unless working with ‘small’ companies) will lose the right to set their own status, they are not powerless – they can have their contracts reviewed by us at GoodHR, discuss reform with their end client or obtain a Confirmation of Arrangements as to the true nature of the working relationship.
However, engagers are likely to take a safe approach which will lead to many more freelancers being taxed under PAYE than needs to be the case – including those that could safely operate outside of IR35 if some time and effort was given to setting up the correctly worded contract and assessing status.
Essential to have a correctly drafted freelancer agreement
Invest time and energy now to put the processes in place to help you hire the freelancers you need, when you need them, with minimal tax and legal risk or fuss, and you will reap the benefits of being able to utilise a flexible workforce when things pick up.
The freelancer contract must be carefully drafted. However, it must reflect the actual working arrangement because contractual amendments that are simply window dressing and not a reflection of the true agreement between the parties could rightly be dismissed by HMRC as a sham.
Freelancing isn’t dead, it’s a vital part of our long-term future.
Every business should of course look to be fully compliant around IR35. But they should do so in a way that doesn’t restrict their ability to react to changing needs.
If you’re unsure about whether your contract will be considered inside or outside IR35, it’s advisable to speak to Nicola Goodridge : firstname.lastname@example.org or on +44(0)79178783.