Freelancers and IR35
Dean Redfern, Director at DSR Tax Claims, reveals if this tax legislation applies to you
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