What is IR35?
The British government has introduced legislation which has allowed HMRC to collect tax payments from self-employed workers. This legislation (Inland Revenue 35 or IR35) was introduced in 2000, in order to battle against tax avoidance and ‘disguised employment’. By early April 2020, these laws will be enforced, and investigations will be launched. As a self-employed person, you need to protect yourself.
Self-employed people, whether a contractor, freelancer or business owner, do not have the luxury of paid holidays, sick days, or knowing how much they will earn each month as those with fixed jobs have.
Contractors must work out how much tax and National Insurance they must pay. So, if a contractor is caught not paying enough, the punishment is to pay 25% more in tax per annum. So, it is within their best interest to avoid this.
Before IR35 rulings, there was a loophole for self-employed people benefitted from, which was called the ‘Friday to Monday’ situation. In simple terms, this meant that technically a worker could leave their job on Friday and start up their own limited company and return to the same role on Monday but as a limited company. Therefore, this represented lost earnings to the treasury.
So, IR35 is seeking to create a contract with the worker and end client. This can be sorted into two categories. The first category is a contract for services, which is a genuine contract for services between the client and the self-employed person. The second category is a contract of service or ‘disguised employment’, which is a hypothetical contract between the self-employed worker and the end client.
By 2020, implementation of the law will be pushed on the majority of private sector businesses.
What can you do to prepare for implementation?
As a contractor, you can quickly know if these upcoming changes will apply to you. You can take this short quiz on the government website. This short test has been created by CEST. With the results of the quiz, you will have a clear indication to see what preparations you need to make, and advisors will have a better structure of advice for you. With this in mind, you should arrange a meeting with your accountant, to gain specific and well-informed advice for your situation.
However, CEST is a controversial tool that has received a lot of criticism. As a result, with the result you obtain from it, you do not need to accept it. Yet, it is plausible that a lot of end clients will utilize this tool, take it literally and act upon it. Therefore, it is important to understand the result of it and act upon it.
If the CEST test determines you are ‘outside’ of IR35, then you need to collect up evidence for this ruling. Such evidence could include an independent assessment from an expert in IR35. You will also need to prove that you are not an employee of the end client, this can be done by ‘acting like a business’ by marketing yourself as one and selling services to other companies.
It is advisable for engagers (the contractor’s client) to start arrangements now, to decide whether IR35 applies to the contractor, otherwise rushed and risky decisions might be made just before April 2020.
HRMC has apparently upgraded and extended its resources for policing IR35, as a result of an investigation into a contractor is a lot higher than it would have been some time ago. Being under investigation is a lengthy, stressful, and very undesirable process. Therefore, taking out IR35 insurance is a wise idea.
IR35 insurance will cover you in the legal department, with defendants in and out of court. If you are found to be inside IR35, then HMRC will want huge sums of money to make up for unpaid payments. In infamous cases, this can be up to thousands and thousands of pounds. IR35 insurance will cover you for this. Therefore, you would be covered if the inquiry ends badly. In addition, IR35 insurance can cost as low as £100 a year!
Contractors can avoid HMRC’s by not submitting late tax returns, or submitting one with errors, as this will put you under an investigator’s radar because it suggests you may make future mistakes.
Another way that self-employed people can avoid IR35 is by joining an ‘umbrella company’. Once you join an umbrella company you then work for that company; which then contracts you out to clients. The umbrella company will pay you directly and will appropriate tax and National Insurance reductions. The company will also keep a small amount of money from the employee’s revenue.
Deciding to go with an umbrella company might not be for everyone however, they are a safe option. If you choose to join an umbrella company, there are some things to keep in mind when deciding which one to go with and finding the one best suited for you. To name a few, it is suggestable to review the payment schedule (weekly, bi-weekly, or monthly), if it has insurance cover, and if there is a pensions scheme set up. We strongly recommend to consult our specialist team before joining an umbrella company.
Mutuality of obligation (otherwise known as ‘MOO’) is a way HMRC can determine employment status. MOO is when an employee is required to provide work to a worker, who must accept it. MOO can be avoided by introducing freedoms into contracts, such as a worker being able to refuse work set by the employee or choosing other products over the project proposed. As a self-employed worker, you must keep a record of refusals of work as this provides evidence of a lack of MOO.
Regardless of if you are ‘inside’ or ‘outside’ IR35, you need to make preparations, we suggest following the advice we have provided as you do not want to be caught out during an investigation and pay huge sums of money, ultimately which could have been avoided.
On a final note, it is strongly advisable to keep up to date with all IR35 private sector news so you can be well-informed on the matter. Contact our specialist IR35 accountants to evaluate your situation and review of your contract.