You may have lost yourself in the tangled maze of IR35 regulations if you’re a freelancer. Perhaps, you’ve heard whispers of it, raising your tax anxieties. Or, maybe it’s become a ghost story haunting your freelancing dreams. But what is this spectre called IR35, and does it apply to you as a freelancer? Take a deep breath. In this comprehensive guide, we’ll clear the fog and help you navigate your way.
The IR35 legislation
IR35 – it’s not a secret code. It’s UK legislation designed to prevent tax evasion by workers supplying their services through an intermediary, like a limited company, while they’re practically acting as employees.
This legislation has been around for two decades but has recently undergone significant reforms. As a freelancer, understanding these changes is crucial for the health of your business.
Understanding the IR35 status
Inside or Outside IR35
To truly grasp the impact of IR35 on your freelance operation, you need to comprehend the difference between being ‘inside’ and ‘outside’ of IR35. Picture it as a castle. Being ‘inside’ denotes being within the fortress, deemed a ‘disguised employee’.
Here, you’re treated like an employee for tax purposes and pay tax and National Insurance through PAYE, similar to an employee.
Conversely, being ‘outside’ suggests you’re beyond the castle walls, recognized as genuinely self-employed. In this situation, you handle your taxes and NICs through Self-Assessment like any other self-employed individual.
Your financial responsibilities alter significantly based on whether you’re viewed as inside or outside IR35.
The crucial determinants: IR35 Status tests
Your position within or outside the IR35 castle isn’t decided arbitrarily. It’s determined through a series of status tests. These tests are designed to examine the nature of your working relationship with your client. Let’s delve into each of these key factors:
The first pillar in the status determination process is the ‘personal service’. Are you required to perform the work personally, or can you send a substitute in your place? If the substitution is permissible and genuine, it leans towards an ‘outside IR35’ conclusion.
The next question relates to ‘control’. This aspect scrutinizes the degree of influence your client has over how, when, and where you perform your work. If your client has significant control, it suggests an employment-like relationship, pointing towards ‘inside IR35‘.
Mutuality of obligation (MOO)
MOO evaluates the obligation between you and your client. Does your client have to provide you with continuous work, and are you required to accept it? The presence of MOO is another indicator of an ‘inside IR35’ determination.
Understanding these tests, you can better predict your IR35 status and take necessary actions to align your working practices with your preferred status.
Freelancers vs. IR35: A unique intersection
The rule of thumb: Freelancers and IR35
Freelancers often stand as unique entity in the vast landscape of professional work. Their working model varies significantly from traditional employment, raising the question – how does IR35 apply to them? The rule of thumb is – IR35 doesn’t usually apply to freelancers.
Why? The reason is relatively simple. The IR35 legislation predominantly affects individuals working through their own limited companies. Freelancers, by contrast, typically operate as sole traders – functioning independently without the legal structure of a limited company.
Exceptions to the rules: Freelancers through limited companies
Despite the general rule, there’s an exception. If you’re a freelancer operating through a limited company, IR35 may apply to you. This essentially means that you’re treated similarly to contractors for the purposes of IR35.
For each job you undertake, your client will need to issue a Status Determination Statement (SDS) declaring you as inside or outside IR35. If declared ‘outside’, you continue paying your tax and NICs through Self-Assessment as usual.
If declared ‘inside’, your tax and NICs are deducted at source through PAYE, and you’re taxed at the same rate as an employee.
Interpreting the consequences: IR35 for freelancers operating through limited companies
If you’re a freelancer operating through a limited company and fall inside IR35, it doesn’t mean the end of the world. While you’re subjected to the same tax and National Insurance rates as employees, it’s important to note that general freelancer working practices often make it unlikely to be declared inside IR35.
However, the transition could impact your net income and may necessitate changes in your business operations. In this scenario, professional advice and assessment tools can be invaluable in ensuring you’re prepared and fully compliant with the legislation.
Understanding these nuances of the intersection between freelancers and IR35 is crucial to ensure you’re not caught off guard by any sudden changes in your tax status. By staying informed and proactive, you can continue to navigate your freelancing journey successfully.
Consequences of the IR35 reforms
The recent changes in IR35 legislation shift the responsibility of determining your IR35 status from you to your client, provided they are a medium or large business. Now, your fee payer holds the tax liability. These changes have flipped the script, changing the landscape for freelancers.
Cross-checking your IR35 status: A wise move
The necessity of cross-checking: Why bother?
While the new IR35 legislation has created a significant shift in the responsibility of determining IR35 status from the contractor to the medium or large client, it’s still crucial for freelancers and contractors to stay in the loop.
Why? Primarily because it’s about your income, tax liabilities, and how your business operates.
Despite the client’s determination, you should still cross-check your IR35 status. This gives you peace of mind and enables you to dispute the client’s decision if you disagree, using evidence to support your claim.
The methodology: How to cross-check?
Cross-checking your IR35 status isn’t rocket science, especially with the right tools at your disposal. For instance, the Kingsbridge IR35 Status Tool simplifies the process of checking your IR35 status for any given engagement.
Designed by a seasoned tax professional, this tool asks between 29 and 34 questions about your contract and working practices to provide a comprehensive view of your engagement. The questions revolve around the crucial determinants of IR35 status, such as personal service, control, and mutuality of obligation.
Understanding the outcome: Interpreting the results
The result from this status tool is typically an ‘inside’ or ‘outside’ determination, accompanied by a detailed report highlighting the strengths and weaknesses of your case. However, if your result is borderline, it gets reviewed by in-house IR35 specialists for a more accurate determination.
Engaging in this cross-checking activity helps ensure your business operates in line with legislation. It may also help you make informed decisions about accepting an engagement and guide discussions with clients about your working practices and contract terms.
Cross-checking your IR35 status is a wise move to stay ahead in the rapidly changing freelance and contract work landscape. Empowering yourself with this knowledge can help ensure compliance and equip you to make strategic decisions that protect your business interests.
You’re a freelancer, and you’re still wondering, “Does this IR35 stuff apply to me?” Well, for most freelancers, the answer is no, it doesn’t. This is because most freelancers work on their own and not through a company.
But, if you’re a freelancer who works through your own company, then yes, IR35 does affect you. This means how you pay your taxes might change depending on the rules of each job you take.
Understanding IR35 might seem hard, but don’t worry! With the right information and tools, it’s something you can handle. And remember, as a freelancer, learning new things like this is part of your job.
So, keep going, keep learning, and you’ll be able to handle anything that comes your way. You’ve got this!