What is IR35?
OK flexible workers – with many of us currently or considering freelancing, TWFM asked our legal expert, Trusha Patel to clue us in on the important stuff – separating myth from truth so we can happily freelance our way through 2020 post-April.
It’s time to get clear on what IR35 means for you!
First of all – what is IR35?
IR35 is a tax law designed to assess whether a contractor working through a limited company is a genuine contractor rather than a ‘disguised’ employee, for the purposes of paying tax.
Contractors who work through their limited company enjoy a level of tax efficiency. While they don’t get employee benefits (like holiday and sick pay), they have flexibility and control over their work.
Some contractors (and their hirers) might try to take advantage of the tax efficiency of working through a limited company, when in practice the contractor is essentially working as an employee.
Basically, it can affect the way you pay tax as a freelancer.
But it’s not quite as simple as that, so Trusha has written us a guide…
Myth: The law applies to all freelancers
Truth: IR35 only applies to personal service companies meaning freelancers operating through a limited company. That is not to say that self employed freelancers aren’t necessarily classed as a deemed employee – it just means that different rules apply here. You should check the terms of your contract for compliance.
Myth: If I work for multiple clients, I must be outside of IR35
Truth: There are many factors at play when HMRC consider any particular contract . Importantly, each assessment is on a per client or per contract basis. You could end up with one contract being inside and another being outside. Factors that would be considered include control, substitution, mutuality of obligation and financial risk. But there are others too so seek help if you need it.
Myth: As long as my contract is IR35 compliant, I will have no issues with HMRC
Truth: How your contract is drafted is extremely important, but that must match what is going on in practice. If your contract says you can work from anywhere but your client insists you need to be on site because that is their policy, that could point to IR35 being applicable. This is a good opportunity to dust off those contracts and see if they need updating and strengthening.
Myth: The new rules put the onus on the clients to determine whether IR35 applies, but I only work for small clients so I don’t need to do anything
Truth: Yes there is a change to who determines the status of private sector contracts, and depending on the size of your client and thresholds, the onus will fall on them. However, if you work for smaller clients, you will still be responsible for determining whether IR35 applies. My advice is to check it properly and if you’re not sure, get help!
Myth: I can’t be both inside IR35 and outside IR35
Truth: You can! The analysis is on a client contract by client contract basis, so you could well have one contract that is inside IR35 and and one that is outside.
Myth: If I am inside IR35, I ought to get employee rights
Truth: IR35 is about tax liability, and only tax liability. So even if IR35 applies, there’s still no sick pay or holiday I’m afraid!
Myth: I am on retainer with one client and if I take a break in between extension of contracts, that will keep me outside IR35
Truth: IR35 is about a holistic analysis, tying in contractual clauses with working practices. Sadly optical changes like having a short break in between contract extensions won’t keep you outside of IR35 if everything else suggests that you are inside.
Myth: If HMRC investigate me, I can rely on my professional indemnity insurance to cover me
Truth: General professional indemnity insurance and public liability insurance does not usually cover tax investigation. There are insurers who do provide this type of insurance though so speak to your broker.
What can I do in preparation for April?
The first (free and easy) step would be to take each contract you have and use that to complete the CEST (check employment status for tax) tool on the HMRC website to get a ‘determination’ per contract. This can then serve as documentary evidence that you have assessed your contracts.
When answering the questions, make sure you apply both what happens in practice as well as what is written in your contracts.
If you work with large clients and haven’t yet been reviewed, have the conversation now! A larger client is described as one with at least two of the following:
- Annual Turnover more than £10.2 million;
- Balance sheet total more than £5.1 million,
- Number of employees more than 50
If your determinations are inside IR35, engage a professional to review your documents and complete further analysis for you
Any mistakes could be costly. Check your contracts, check the CEST tool, have the conversation with your clients.
If you need help then I offer a free 20 minute discovery call following which I can help review and update your contracts and provide practical advice on staying outside IR35 where possible. Get in touch with me here.
Good luck, freelancers!
Bio – Trusha Patel
Trusha is a consultant lawyer with an entrepreneurial background, she works to give small businesses and freelancers peace of mind that they are legally protected and GDPR compliant, with her commercially pragmatic and easy to understand legal advice and contracts.
With 11 years experience spent between a top 3 magic circle (aka leading!) London law firm and international investment banks, Trusha went on to become an entrepreneur for several years before bringing the wealth of insight and a solid business mind back to her legal practice. She founded an organic spice company in Canada where she was living at the time – and then brought it to the UK. Gaining real-world experience across multiple disciplines in international trade with her small business has enabled Trusha to bring a unique legal approach and perspective when helping her clients across a variety of industry sectors.