New rules on how off-payroll consultants are treated are coming into force in April 2020, sending shockwaves to freelancers in all industries.
Private sector employers who have seen this change coming have already taken steps to renegotiate working arrangements with their freelance workers; others are simply not aware of their new tax responsibilities.
But if you’re an independent contractor or freelancer, it’s vital to understand the implications of IR35 so you can report and pay taxes properly and don’t suffer penalties from HMRC.
In this article we’ll break down what IR35 is, let you know if it might impact you, and what you can do if it does.
What is IR35 and what do these changes mean?
IR35 is a tax law issued by HMRC in 1999 to stop independent contractors from taking unfair advantage of favourable taxation by providing services through a limited company or some other means. Freelancers operating through a private company generally pay lower income tax and don’t have to pay national insurance.
Since April 2017, firms in the public sector have had to decide whether their contractors fall under IR35, and from 6 April 2020 this responsibility will spread to the private sector.
As a result of these changes, medium and large organisations in the private sector will soon become responsible for determining the IR35 status of the freelancers they engage.
However, if a freelancer is engaged by a company that HMRC deems to be small, they will fall under an exception and the new rules will not apply. In other words, freelancers serving small companies will be able to continue determining their own IR35 status as it relates to these small businesses.
Who does IR35 impact?
There are two main types of workers who may be affected by IR35:
- Independent contractors: self-employed people providing longer-term services or working on larger projects for their clients, almost like a temporary employee.
- Freelancers: self-employed people providing short-term services or working on smaller projects, often for many clients at once.
It doesn’t matter what sector or industry you are in – if you’re an independent contractor or freelancer, you may be affected by the changes to IR35. This applies across every type of job role, skill set, expertise and profession.
The distinguishing factor is this: IR35 will only impact a contractor or freelancer if they are essentially treated as an employee by a business they are working for, but provide services through their own limited company to avoid paying higher taxes. These are known as “Disguised Employees” to HMRC.
Essentially, if you’re treated like an employee on a day-to-day basis but file taxes as a freelancer or independent contractor, you are very likely to be affected by IR35.
What does “inside” and “outside” IR35 mean?
If you’ve looked into IR35 before, you’ve likely heard the terms “inside IR35” and “outside IR35”. To be “inside IR35” means that you are considered, for tax purposes, an employee of your end client and therefore subject to PAYE.
Should you be found to be “inside IR35” when you have claimed not to be, HMRC will charge you for all income tax and national insurance contributions for the entire time period you should have been taxed as an employee – along with interest and potentially a penalty or fine.
To be “outside IR35” means that you are operating as a genuine business (not a “disguised employee”) and therefore operating outside of the IR35 rules. If you are operating “outside IR35”, you are allowed to remain responsible for your taxes as usual.
What is the impact of being found liable under IR35?
If you are found liable under IR35, the main impact is that you will need to pay more tax. The amount will vary depending on your unique circumstances.
Generally speaking, for a freelancer or independent contractor, moving onto payroll on the same salary means as much as a 20% reduction in take-home pay.
What can I do if I am affected by IR35?
If you believe you will be caught under IR35, you should talk with your client about your IR35 status as soon as possible. This will give you the opportunity to discuss any differences in opinion.
Finally, you should get your finances in order so you are able to pay the tax and national insurance that HMRC will demand beginning on 6 April 2020.
In all cases, we recommend you speak with your accountant and a tax lawyer so you can make the right determination about whether you are “inside” or “outside” IR35, and understand what your liabilities are likely to be.
If you’d like advice about your particular situation, book a call with our IR35 specialist and we’ll give you legal advice tailored to your case.