IR35 – what it currently means to freelancers and the self employed

Many consider leaving permanent employment to become a contractor or a freelancer and do not consider the things that need to put in place. Whether it’s payment terms or professional indemnity insurance there’s plenty to think about before starting this new business.

At the top of the list should be tax, and in particular making sure your business complies with IR35. IR35 effects everyone who is self employed and should not be ignored.

In 2000 a specific piece of legislation – referred to as IR35 – was brought in designed to stop an employee from leaving their permanent job and then returning as a contractor to perform their old role in a bid to avoid paying tax and National Insurance at the higher rates. For example a HR advisor could resign from their job on a Friday as an employee then return on the Monday as a contractor with exactly the same role but just working under their own Limited Company. If you don’t have your own terms in place then it may be that you are working under your clients terms and you should get a professional to read over them.

Remember if that contract falls inside IR35 it will be you that is penalised with fines.

The three main principles to decide IR35 status

Determining whether IR35 applies to your contract is a complex matter. However there are three key principles that will determine your IR35 status and what you should look out for if you are agreeing to your clients terms:

• Supervision, Direction, and Control: What level of supervision, direction and control does your client have over what, how, when and where you complete your contract and the day to day running of it? These are tests of ‘employment’ that could put a contract ‘inside of IR35’, If your client is overseeing your standard of work, or telling you when to take breaks etc then it is likely you would be deemed as employed. These clauses should never appear in a contract – contractors and freelancers should have control over when and how they work, not the client. If you are be directed to management guidance, appraisals or any type of monitoring it is likely HMRC will probably conclude you are under the control of your client – this will make you, in their eyes, an employee and not a contractor.
• Substitution: Are you required to carry out the work yourself, or you can you send someone in your place?  This is a huge one and one I often come across. You should be able to send a substitute to complete the work on your behalf. The right to send a substitute must not be restricted and you genuinely must be given the option provide someone in your place.
• Mutuality of obligation: As a contractor you must work on a project-to-project basis, with absolutely no obligation to carry on working once that work is complete. A contractor also has the right to terminate a contract part-way through. An employee, on the other hand, can only work for one company and has an obligation to carry on working when their tasks are complete. If the contract states that you must work a certain number of hours per week at a certain rate on an ongoing basis and requires you to take whatever work is thrown at you, then this would suggest the contract should be inside IR35.

Long-term contractors and freelancers who work through their own limited company or on a self-employed basis must ensure their contracts accurately reflect their working practices in their client/contractor relationship.

It is important to remember that if you are under investigation, HMRC will more than likely want to see your contract and your working practices must absolutely reflect what is in your contract.  You must provide clear evidence to support your status as a self-employed professional.

Contractoruk.com said that if challenged ‘the overall picture will be made up by how the contractor operates on a day to day basis – the reality of which must be reflected by the contract. A common argument from HMRC to discredit the contract is that the contract has been “bought off the shelf” or has been copied from another contract and does not therefore reflect actual terms. Another reason why copy and paste and templated documents is a ‘no no’.

I would recommend having a set of business terms written bespoke to you and the client is then bound. This is a huge step in the right direction to ensure your working relationship does not fall inside IR35.

This is how the law is now… From April 2020 every medium and large private sector business in the UK will become responsible for setting the tax status of any contract worker they use and not the other way round.

If you are unsure about your IR35 status give us a call and we can help with an IR35 Contract Reviews, Business Terms or advice.