IR35 – Are you ‘in’ or are you ‘out’?
New legislation is on its way in April 2020. You’ve probably heard of IR35 if you are, or you employ, freelancers or self-employed contractors. If so, then you need to understand the implications to ensure that you keep HMRC happy.
Essentially, the new regulations look to plug the issue of disguised employment. Some contractors bill for their services via a limited company to take advantage of the tax benefits. But in reality, they are operating as a full-time employee. This occurs when a contractor, amongst other things, is under the supervision, direction and control of the client and therefore being indistinguishable from a full-time employee.
If the relationship is truly that of a freelancer or contractor, it’s not a problem. There are thousands of genuine such transactions taking place every year.
But to combat cases where it’s deemed to be disguised employment, the IR35 legislation is designed to ensure that contractors working via their limited companies, and are assessed as being treated the same as an employee, pay broadly the same amount of tax. These new rules come into force on the 6th April 2020, and from that date, the client will have to determine if a contract is inside or outside IR35.
To demonstrate that there’s no employment relationship, the client must determine certain relationship criteria to establish whether they are within or outside of IR35. As a general rule, IR35 won’t apply if the contract is for the services you provide instead of employment. Three of the guiding principles that decide if your business falls inside or outside of IR35:
When you are self-employed, you have no ongoing obligation to carry on working with a client once a contract has finished. Likewise, the employer does not have to offer you any further contracts. If you are under a contractual obligation to continue either giving or receiving work, or your contract says that you cannot work with other clients, you fall within IR35.
If your contract with a client specifies that only you, as an individual, can complete the contract, you fall within IR35. To fall outside of the regulations, you must be able to substitute yourself with someone else who can complete the work.
To fall outside of IR35 you must have control over your own working methods and patterns. If a contract sets working methods, then it’s likely to count as employment rather than contract work.
It’s important to understand that an HMRC inspector will look at what actually happens in practice, rather than the specifics of the contract.
Here’s a quick check guide to of some of the factors that will be taken into account when the HMRC tests to see if you’re ‘in’ or ‘out’.
|Paid by project?||In||Out|
|Client buys your tools, e.g. phone?||Out||In|
|Manage client’s staff?||Out||In|
|Work for other clients?||In||Out|
If you have concerns about a relationship with a contractor, or you are self-employed and want to check your status, HMRC provides an online test tool CEST that can check this. This tool is in the process of being updated for the implementation of the new rules from 6th April 2020.
Of course, we can only give you broad information here, before taking any action you should always ask the advice of a tax professional.