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What is IR35 and does it apply to you?
20 May

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First things first… What is IR35?

IR35 is a tax law which came into force in April 2000 - a pretty long time ago! The law assesses whether a contractor is genuine - as opposed to a ‘disguised employee’ - for tax purposes. You might've heard about it in the news relating to a certain Lorraine Kelly... there'll be more on this later! 

The aim of the law is to clamp down on tax avoidance by those who sneakily claim that the work carried out is of a contractual nature (‘outside IR35’), rather than out-and-out employment (‘inside IR35’).

It effectively gives HMRC the power to decide whether people working for organisations are employees or freelancers. So, anyone deemed to be an employee will have to pay tax and NICs accordingly, rather than by self assessment rules which can be extremely pricey for the worker...

Public and private sector: is there a difference?

In a word - yes! As if it wasn't confusing enough already, different rules are applied to the public and private sectors. In the public sector, those doing the hiring have to work out whether the worker is inside or outside of IR35. In the private sector, this falls to the worker. However, from April 2020, public sector rules will apply to the private sector - so the burden will always fall on the company doing the hiring.

Why is the employee/freelancer distinction important?

Not being employed by a company means that workers don’t get benefits such as sick and holiday pay. At the moment, contractors who have limited companies enjoy certain tax breaks in a way of balancing that out.

However, if an intermediary - such as a limited company or partnership - is being used to disguise what would otherwise be a relationship of employment, then the worker is taking advantage of tax efficiency. Equally, the ‘client’ is avoiding having to make employers’ National Insurance contributions and obligations to give employees certain benefits. Naughty!

So how exactly can freelancers be differentiated from employees?

There are three principal tests of employment that may be applied:

  1. Control. How much control does the organisation have over when, where and how the worker does the required work? If you have to be in an office from Monday to Friday, nine to five, then you begin to look quite a bit like an employee!
  2. Substitution. Does the worker personally have to do the work, or can a substitute be used? If you can use subcontractors to complete parts of your contract, then you’re unlikely to be viewed as an employee.
  3. Mutuality of obligation (MOO). Is the organisation obliged to offer work, and the worker obligated to accept it? If when work goes quiet, you don’t turn up and don’t get paid for a spell, that looks a lot like freelancing.

There are other tests that can be applied, such as who provides equipment used and whether you get paid regularly or on a per-project basis. But essentially if you have an employer-employee relationship in all but name, you may fall foul of IR35 and be taxed accordingly. 

Can you provide any examples of IR35 being applied in real life?

Gladly! There was a high-profile example of IR35 being applied and overturned in March 2019. Lorraine Kelly successfully appealed a £1.2 million tax bill (yowza) which had been applied by HMRC after it claimed that Ms Kelly was an employee of ITV, rather than self-employed.

In cases such as these, HMRC can infer a notional contract between companies and alleged employees. Here HMRC argued that - despite a contract existing between ITV and Ms Kelly’s company Albatel Limited - the nature of the relationship was effectively that of a corporation and an employee.

It was overturned in a tribunal, where it was shown that Ms Kelly exercised a degree of control that employees don’t have in standard employer-employee relationships. So Ms Kelly passed the first test. In addition, she didn’t receive staff benefits such as sickness or holiday pay, and was free to undertake work elsewhere.

Might I fall foul of IR35?

If you have a legitimate small business, in theory you should have nothing to worry about. You will pay tax via self assessment and pay your NICs in the usual fashion. The HMRC may still investigate you, however. Even if you’re legitimately self-employed, the investigation can be time-consuming and stressful. Plus it can look back at your business over six years. Yikes!

Want to make the whole process easier?

Have you been freelancing with the same company for some time? Are you worried about the potential IR35 implications? Here at Mazuma, we’re happy to talk to you about any concerns you may have. To help put your mind at rest, and for legitimate pointers as to how you can keep your nose clean tax-wise, feel free to contact us today.

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