Free­lancers and IR35

Dean Red­fern, Di­rec­tor at DSR Tax Claims, re­veals if this tax leg­is­la­tion ap­plies to you

Web Designer - - Contents - David Red­fern Di­rec­tor, DSR Tax Claims dsr­tax­

If you are work­ing as a con­trac­tor or free­lancer, there is a very good chance that you have heard the term ‘IR35’ banded around in em­ploy­ment news lately. For such a com­plex set of tax reg­u­la­tions, it is cer­tainly caus­ing tremors in the con­tract­ing sec­tor thanks to a num­ber of high-pro­file cases fea­tur­ing free­lancers and con­trac­tors pit­ted against Her Majesty’s Rev­enue and Cus­toms (HMRC). But, what is this leg­is­la­tion, and does it ap­ply to you? IR35 or ‘off-pay­roll work­ing through an in­ter­me­di­ary’, is a piece of HMRC leg­is­la­tion orig­i­nally in­tro­duced in April 2000 and in­tended to elim­i­nate tax avoid­ance by work­ers who sup­ply their ser­vices via an in­ter­me­di­ary, oth­er­wise known as “dis­guised em­ploy­ees” by HMRC. The idea be­hind it is to crack down on those work­ers and clients who are evad­ing their full PAYE and Class 1 Na­tional In­sur­ance re­spon­si­bil­i­ties by falsely claim­ing self-em­ploy­ment when they are de facto em­ploy­ees. And as a piece of leg­is­la­tion, it sounds per­fectly rea­son­able — HMRC should have the pow­ers nec­es­sary to crack down on those claim­ing false self-em­ploy­ment for tax pur­poses. In prac­tice, how­ever, it isn’t prov­ing to be so sim­ple, and that’s the rea­son for the mul­ti­tude of ar­ti­cles on the sub­ject.

If you pro­vide your ser­vices to a client through an in­ter­me­di­ary, such as a per­sonal ser­vice com­pany (PSC), you come un­der the re­mit for IR35 which means that you need to be aware of the bounds of your con­tract with your client to as­cer­tain whether this leg­is­la­tion shows you to be em­ployed or self-em­ployed. And it should be a sim­ple process — HMRC has even de­signed an on­line tool to help you to de­ter­mine whether you are classed as self-em­ployed in the eyes of HMRC. But due to the com­plex na­ture of IR35, it is prov­ing to be any­thing but sim­ple.

Some of the cri­te­ria for self-em­ploy­ment used by HMRC and CEST (Check Em­ploy­ment Sta­tus for Tax) are easy enough: do you use your own equip­ment, are you al­lowed to work for more than one client, do you have the right to send a sub­sti­tute in your place? Un­for­tu­nately, with IR35, HMRC fails to recog­nise the range and va­ri­ety of work­ing prac­tises and con­tracts within our modern, con­tem­po­rary econ­omy in which an es­ti­mated 15 per cent of all work­ers iden­tify as free­lancers and con­trac­tors, 200,00 of them through PSCS.

Re­forms to the leg­is­la­tion made in April 2017, placed the onus on de­ter­min­ing who was to be classed as em­ployed or self-em­ployed to pub­lic sec­tor em­ploy­ers, re­sult­ing in such or­gan­i­sa­tions mak­ing blan­ket de­ci­sions about the con­trac­tors within their or­gan­i­sa­tion — with dis­as­trous re­sults for some of those con­trac­tors. Af­ter all, when HMRC de­cides to in­ves­ti­gate it’s the tax­payer who gets in­ves­ti­gated, not the or­gan­i­sa­tion who deemed them self-em­ployed. The me­dia have made much out of the case of Christa Ack­royd, a BBC pre­sen­ter whose tri­bunal case loss against HMRC is likely to cost her an ex­tra half a mil­lion pounds in tax, but there are many other lesser-known con­trac­tors who are be­ing forced to bat­tle HMRC through the courts — such as IT con­trac­tor Ian Wells, who pro­vided ser­vices to the Depart­ment of Work and Pen­sions (DWP) through his own lim­ited com­pany and found him­self run­ning up against HMRC, who be­lieved he should have been clas­si­fied as an em­ployee rather than a con­trac­tor. In that case, the tri­bunal found in favour of Mr. Wells – luck­ily for him, be­cause HMRC be­lieved him to owe an ad­di­tional £27,000 in un­paid tax.

Fur­ther con­tro­ver­sies, sur­round­ing the ac­cu­racy of HMRC’S CEST tool and its omis­sion of mu­tu­al­ity of obli­ga­tion (MOO), may give you a clearer idea of why it is so vi­tally im­por­tant for all IT con­trac­tors to up­scale their knowl­edge and aware­ness of IR35, and its im­pli­ca­tions for their own em­ploy­ment sta­tus and tax po­si­tion. With HMRC look­ing to ex­tend the 2017 re­forms to the pri­vate sec­tor soon, IR35 will draw more con­trac­tors and free­lancers into its net. As tempt­ing as it can be to bury one’s head in the sand when con­tem­plat­ing taxes, I would urge all free­lancers and con­trac­tors within the IT in­dus­try to ob­tain clar­ity on their own em­ploy­ment sta­tus with­out haste. Due to the com­plex­i­ties of the leg­is­la­tion, far greater than I can do jus­tice to here, ex­pert ad­vice may be ad­van­ta­geous to en­sure that you aren’t in­volved in a lengthy and costly bat­tle with HMRC.

If you pro­vide your ser­vices to a client through an in­ter­me­di­ary, you come un­der the re­mit for IR35

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