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IR35 refers to legislation that aims to close a loophole where some employees act as contractors to pay less tax than payrolled employees. These changes will come into effect in April 2020, so if you’re a freelancer, it’s important to understand how this may alter the way you do business with your clients!
What is IR35?
IR35 came about as the government believed that some contractors were paying less tax than appropriate. It was felt that some people would leave their role as a payrolled employee for a company, only to work in the same role as a freelancer. This could then mean that they would benefit from their new situation as they would be seen as a ‘limited company’, an entity whose earnings are taxed at a lower rate than income tax. IR35 is already in effect in the public system, however those working in the private sector will also be affected when the law changes.
It’s not all bad news though, as it can mean that if you’re in a genuine contractual relationship with your clients, this crack down may not affect you because the laws are subjective. Therefore, assessing whether you operate inside or outside the legislation is important. When the law changes, your clients will make the decision on whether you’re inside or outside IR35.
As it will be your clients’ responsibility to assess your IR35 status, it’s important that both you and they understand your contract. It may also be a good idea to keep evidence of the relationship you have with your client and how it differs from their payrolled employees. This may include things like a different email signature, or an instance where you informed your client of an absence and didn’t request permission (as an employee would have to).
In general, to sit outside the IR35 legislation, it must be proved that you provided a service as a business, rather than an employee.
When it comes to the means of assessment, your client may choose to use an online IR35 assessment tool, like Check Employment Status for Tax (CEST) that can be found on HMRC website, or an independent assessment service. Once they have made their assessment, they must inform you of your status through a Status Determination Statement.
If you believe there has been a mistake in the assessment, you can appeal the decision through HMRC’s ‘Alternative Dispute Resolution’ service, or you can choose to escalate to an IR35 tribunal.
Your options if you sit inside the legislation
If you’re found to be under the IR35 umbrella, it means that the government has classified you as an employee of your client for tax purposes. As this will mean that your client is liable for any tax that you, as an employee, fail to pay, it’s likely that your client will want to change your contract so you’re no longer affected by the legislation.
One option is to bring you onto their internal payroll as this will negate IR35 completely. Or, it may make sense for you to reduce your hours, work remotely or work with less supervision to continue to freelance for their company. However, you will possibly lose some flexibility in a new arrangement, so it’s important that you understand what these changes would mean before you agree to any new terms of business.
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