Why you should know about IR35
What is IR35?
IR35 is a piece of tax legislation targeting tax avoidance by freelancers, consultants, contractors operating via a limited company, who should be classed as and, most importantly, taxed like a permanent employee of their end client. Basically, if you are working very much like a permanent employee of your client as opposed to having more of a business-to-business relationship, then the HMRC defines through IR35 rules, that you should be paying taxes aligned to those of an employee.
Many companies like using freelancers, self-employed consultants and contractors. Using this temporary resource helps businesses get projects completed, get advice quickly and obtain extra manpower without any long-term commitments. All of this without worrying about employment law, PAYE, National Insurance or statutory benefit obligations. It also enables the company to appoint support without statutory termination obligations. Companies just appoint the expert help and pay upon receipt of invoice.
For those offering services to companies it means lower taxation obligations, being their own boss and the ability to charge on a day rate, project rate or retainer basis without the need to disclose to the client what their profit margins are or how much dividends they draw for personal income. They can also charge for mileage and other expenses by adding an administration fee. There is however a HMRC rule called the IR35 which, until now, has affected those primarily in the public sector such as private specialist medical consultants and nurse locums operating in the NHS for example. In IT, contracting under IR35 has also been quite commonplace. The Government introduced changes for the public sector in April 2017.
A year ago, in the Autumn of 2018, the Government announced that IR35 rules will be reformed within the Private Sector from April 2020. Such changes to mirror the changes introduced within the Public Sector last Autumn 2017. The changes are being introduced to target perceived tax avoidance by off-payroll workers. This means that rather than a freelancer, self-employed or contractor deciding their own IR35 status, the end client or the recruitment agency will be responsible for assessing whether the appointment falls inside or outside of IR35.
If your company wants to appoint a freelancer, self-employed or contractor, you must determine whether you want the person to:
- Attend your premises on specific days of the week, every week
- Be available on specific working hours; for example: must be working for you 9 to 1 or on same hours as your staff, with no flexibility on these hours.
- Observe policies and procedures that apply to your staff
- Work full time on your behalf
- Not have any other clients whilst on your assignment
- Not take on any work from competitors whilst working on your assignment
- Avoid holidays or time off during the assignment
If any one, or more of the above apply to your requirements; then you must appoint under IR35 rules. This means that the freelancer, contractor will need to accept a contractual arrangement where the fees are taxed at source by your company. The Government is suggesting that small business will be exempt of IR35 rules, yet it is important you check that your company is indeed, exempt by checking with the HMRC.
IR35 is likely to not apply to assignments where the person (worker):
- Determines how they will deliver the work
- Chooses their hours of work
- Chooses when they will work on the client site, work virtually and whether they are travelling abroad and working whilst away on the assignment
- Has more than one client in a 12- month period
- Has no obligation to turn down work within the same marker sector as the client including a competitor(s)
- Can and does send in a substitute to deliver the work on their behalf.
When the law comes into force, their clients will make the decision about whether the freelancer will be taxed at source or paid gross.
Clients could lose money as they experience huge administrative pressures, driving up internal paperwork and recruiter costs.
Prepare your business so that you can continue to enjoy the benefits that hiring freelancers, consultants and contractors brings to your business. We support businesses with:
- IR35 compliant supplier agreement contracts
- Recruitment Agency, PSC frameworks that take account of IR35 rules to safeguard your business.
- Assist you with IR35 Status assessments
- Putting together assignment briefs that reduce your risk of IR35 breaches.
- Audit your current supplier pool and identify areas of risk and how to address them, taking account of employment law and IR35.