If you’re a freelancer or self-employed contractor, it’s likely that you’ve heard of and are confused by IR35 rules. You’re not alone.
IR35 is designed to reduce tax avoidance by contractors who HMRC believe to be “disguised employees” – people who work in a similar way to full-time employees but bill for their services via their limited companies to make their business as tax efficient as possible.
Private sector IR35 reform is set for April 2020, when the public sector rules will be applied to the private sector. This means private sector employers hiring contractors will be responsible for determining their IR35 status.
Businesses and contractors should start preparing for this change as soon as possible.
So what are the IR35 rules?
To show that there is no employment relationship, the contractor has to prove certain relationship criteria to determine whether they are ‘inside’ or ‘outside’ IR35. As a rule of thumb, IR35 won’t apply if the contract is for the services you provide instead of employment. It’s a good idea to keep the following three things in mind when deciding if your business falls inside or outside of IR35:
- Mutuality of obligation
- Working as a self-employed contractor means you can work in a project-by-project basis without any obligation to continue working for that client once the contract comes to an end.
- Substitution
- If a contract states that the client wants you, and only you, to see a job through from start to finish, then this working relationship will fall within IR35 rules.
- Supervision, direction, control
- Contractors must have control over how they complete their work for a contract to fall outside of IR35.
Several other things to consider whether IR35 applies to you are;
- How you’re paid
- To stay outside of IR35, self-employed contract workers tend to be paid on a project-by-project basis.
- Running a business of your own accord
- Having a website, dedicated office space and employees all goes in your favour of showing that you’re running your business of your own accord. This reinforces that you’re operating as a self-employed contractor and not offering the services you provide as an employee.
- The equipment you use
- If a client provides you with equipment to complete a contract, and you don’t use your own, this could result in HMRC viewing you as a disguised employee.
- Contractor remains separate from client business
- If a contractor becomes an integral part of a business’s structure, such as having managing employees who report into them, this indicates an employee status as opposed to self-employment.
- Exclusivity
- One of the major perks of being a self-employed contractor is that you can work for more than one client at once. However, if you’re deemed to be working exclusively for one client only over a prolonged period of time, HMRC could view this as an employee-employer relationship, meaning you fall within IR35.
- Financial risk
- Self-employed contractors are likelier to experience a higher level of financial risk than an employee would as they have to invest their money into the everyday running of their business.
What happens if I am deemed to be inside IR35?
Whilst there are much better tax benefits to working outside IR35, if you are found to be working inside IR35, there’s no need to panic. You can still run your own company and continue with the projects you are working on, you will just need to ensure you are paying the correct tax.
Your earnings are treated as that of an employee’s would do, in terms of national insurance and tax deductions.
Due to this, you will have to pay a ‘Deemed Payment’ at the end of the tax year to account for any tax deductions or national insurance contributions that an employee would have paid.
How to prepare for IR35
It might be tricky to determine your employment status, but thankfully there are easy ways you can make sure you’re adhering to IR35 rules accordingly when taking on a contract:
Take the IR35 test
To find out if you are ‘inside’ or ‘outside’ IR35, take the HMRC IR35 test to assess your current work practices.
Review your current practices
Assess your current working practices based on the results of the HMRC test. Think about how IR35 changes could affect how you do business – and what you can do to help solve potential problems.
Seek expert advice
Before making any changes to how you conduct business, get advice by contacting us to make sure any changes you make are still compliant with IR35 and other laws and regulations.
