The much hated and confusing IR35 continues to be the hot-topic for freelancers, IT consultants and contractors.
Introduced in 2000, it was aimed at stopping people who were, in reality, employees, from benefiting from the tax and national benefits of operating via a private limited company which were meant for people who were truly “in business”. It’s target were those people who “left” employment on a Friday and started “self employment” at the same firm, doing the same work, on the Monday.
Unfortunately, the ideology and legislation was botched and it has created anomalies, uncertainty and unfairness ever since. HM Revenue & Customs constantly try to argue that real “freelancers” are caught by IR35 – sending them tax bills of tens of thousands of pounds – leading to months, or even years of arguments and appeals as the freelancer argues their case that IR35 shouldn’t apply.
Over the years, the goalposts have moved, particularly as cases have gone through the appeal and tribunals process, and ultimately, the courts. In the early days, it was thought that it was the written contract that mattered. Now, court rulings have determined that the actual real working practices are also just as important.
The main impact of IR35 is that it takes away the benefits of flexibility of mixing low payroll and higher dividend, which would otherwise substantially reduce the overall tax/national insurance paid by the freelancer. It means more tax/NIC is due under the payroll through PAYE. Even for an average freelancer or contractor, the difference can easily amount to tens of thousands of pounds each year!
Factors which determine whether IR35 applies or not include:-
Whether you have to do your work yourself or whether you can delegate it;
How closely you’re supervised and monitored by the client;
Do you do similar work alongside their employees;
Whether or not you’re paid for time spent or stage payments for the project;
Whether you are “part and parcel” of the client’s structure;
Risk and reward – can you make more profit by being more efficient or would you suffer losses for being inefficient or making mistakes.
All of these factors, and more, have to be considered to get an overall picture of the nature of the working relationship. If you act and work like other employees, you’re probably caught by IR35, but if you act and work like a genuine outsider who is treated very differently to their employees, then you’re probably not caught by it.
You can really help yourself by keeping a note or diary to record every instance where you a treated differently from your clients’ employees, however insignificant they may seem – the more differences you can show the better – these won’t change your status on their own but will be helpful in border-line cases. Ideas of differences to note are:-
- Where your (and other contractors) hours are reduced due to slowdown in work or delays in the project, yet their employees continue to work their full hours;
- Where their employers are provided with in-house or external training organised by your client, but you aren’t invited and have to provide your own;
- Where you and other contractors aren’t invited to social events organised by your client, such as Christmas party, product launches, team-building days, and outside-work activities such as a company football team;
- Where you have to park in the visitor’s car park rather than a staff car park, or are given a visitor’s badge or pass rather than a staff lanyard, or where your access to the staff canteen is different to their employees.
None of these are definitive in themselves, but these and other similar “differences” between contractors and employees can certainly help by showing that contractors are treated differently and aren’t “part and parcel” of the organisation.
Sometimes, it will be obvious from your contract and working practices that you are either caught or not, but in most cases, there will be doubt, so we recommend that our clients get their contracts and working practices reviewed by IR35 specialists, QDOS Consulting.
Even if you are caught by IR35, there are ways to mitigate the tax and NIC liabilities and it’s still usually beneficial to operate via your own company rather than through an umbrella or as a direct employee.
Contact us for more details about how we can help with your IR35 issues.