What to expect from IR35 changes
With short-term projects allowing individuals to work flexibly and technology connecting us far more efficiently, now is a great time to be a freelancer. This level of freedom associated with freelancing is only possible when you adhere to the various laws surrounding the work that you do. IR35 is a tax law created by HMRC in 2000, but it is one that is being implemented more in recent years. It can apply to a whole host of businesses, ranging from construction to dentistry, so it is important to be vigilant as it can cost freelancers up to 25% reduction in income.
HMRC’s reasons for cracking down is due to fairness in the economy. Essentially, it is in place to uncover “disguised employees”—people that are working as if they are an employee, but paying less tax than they would with PAYE. Some companies use it to avoid paying income tax and NICs (National Insurance Contributions)
Who does it apply to? Anyone who is set up as a Public Service Company (PSC) or a Limited Company.
HMRC check through audits, either directly looking for IR35 compliance, or if something flags up for them elsewhere e.g running tests for corporation tax. The best way of staying outside of IR35 is to understand the IR35 rules and make sure you are adhering to them. This can be done by finding expert advice on bookkeeping. Some people also opt for an external payroll service, such as People Group Services to manage their incomes from various projects.
With IR35, HMRC’s three main points of consideration to whether you fall inside IR35 or not are as follows:
Supervision, direction and control
This means if you have a manager or someone instructing you on your duties you may fall inside IR35. It is believed that if you are an independent contractor you should be responsible for yourself. Although the nature of your work will be running in parallel to the demands of the company, things like where you work or how you do it can be the deal-breaker when it comes to IR35.
Substitution
If you are a self-employed business, you should maintain the right of substitution. This means that you are providing a service that, at any time along with the project, you can replace yourself with any other person who can do the job. If your skills are tied into the work for your client this could be questioned by HMRC.
Mutuality of obligation
An independent contractor should be able to opt-out of projects to a certain extent. When the terms start to slip into the client expecting you to take work, or the contractor expecting to receive work this is known as “mutuality of obligation” or MOO. This could lead to an investigation.
These are just some of the factors to be aware of with IR35. You may notice that it can reach blurry territory, especially if your work is very similar to that of an employee. But it is one that can be easily maintained by both you and your client if you set up the right structures from the start.
