How to Avoid IR35 & New Requirements

If you’re new to the world of freelancing and contracting, IR35 can initially seem complex, confusing, and more than a little daunting. And that’s because it is. IR35 is based on some highly complicated employment law. And given the nature of their investigations, you’d be forgiven for thinking that even HMRC sometimes seems confused about who the laws should apply to.

This is your essential guide to IR35, and the new requirements for freelancers or contractors. We’ll explain what IR35 is, take a quick look at the new rules, then offer advice on how to avoid IR35.

What is IR35?

IR35 is a system for assessing whether a contractor or a freelancer is genuinely self-employed, rather than a “disguised employee” of a company. IR35 introduced in 2000 to ensure that contractors who work as “disguised employees” pay essentially the same tax and National Insurance contributions as they would if they were an employee of a company.

IR35 might otherwise be known as the “off-payroll working rules” or “intermediaries legislation”. The “intermediaries” part of the legislation should give a clue as to who these rules apply to. Some contractors or self-employed workers provide their services through an intermediary. This intermediary could be a partnership, a managed service company, a private individual, or even the contractor’s own personal service company.

IR35 assesses whether a freelancer is a genuine contractor or should be classed as an employee

What is a “disguised employee”?

Think of it as a means of companies getting all the benefits of having a reliable employee while avoiding lots of the costs. With this sort of arrangement, the employer doesn’t have to offer any employment benefits, and they don’t have to pay any National Insurance contributions.

And what’s in it for the contractor? Well, they get all of the benefits that come with being self-employed – the freedom and the flexibility – with the streamlined tax efficiency that comes from working through a limited company.

What are the New IR35 Rules?

The rules are set to change in April 2020.

Before April 2020, public sector companies were responsible for making employment status decisions. In the private sector, the responsibility fell on intermediaries.

From 6 April 2020, all public sector authorities and all medium to large-sized private sector clients will be responsible for deciding if IR35 rules apply.

But if you provide services to a small client in the private sector, your intermediary will still be responsible for deciding your employment status, and whether the rules apply.

You can read a detailed guide to the new rules on the Government’s website. You’ll find clear criteria on who the rules apply to, and details about who needs to make what decisions, and when. Find the guide here.

IR35 – What Happens If You’re Caught?

If you’re caught in a “disguised employment” situation, you may be subjected to a long (and costly) IR35 investigation. You might be subjected to penalties, and you may have to pay an extra 25% on top of your final tax bill. And all this is to say nothing of the stress, hassle and business interruption that follows an IR35 investigation.

How to Avoid IR35

Genuine contractors, freelancers, interim workers and consultants generally don’t have to worry about IR35. So long as you truly are doing business on your own account, and you’re not using an intermediary for tax efficiency purposes, then everything should be fine. Just take a few simple precautions and you should never have to fear an IR35 investigation.

It all comes down to the contracts. Employment contracts can either be “inside IR35”, meaning the rules apply, or “outside IR35”, meaning they don’t.

So pay attention to your contracts. Here are a few things that might determine whether your contract’s inside or outside IR35 rules:

  • Who calls the shots? If you’re a true contractor or freelancer, you’ll only do the work you were hired to do, and you’ll only complete the tasks outlined in the contract. If the client feels able to simply move you from task to task, or to offer strict instructions on how you should complete your work (rather than an essential brief, with feedback), then it might suggest to HMRC that they’re not hiring you so much as employing you.
  • Strictly contractual. Mutuality of obligation (or MOO) is a working relationship whereby an employee takes on any work their employer offers. Needless to say, if you want your contract to be considered outside IR35, then you need to stick to the contract. Only complete the tasks that are specified in the contract, and don’t take on any extra work just because the client asks you to. If they want to offer you more work, great! Just make sure you draw up a new contract and treat it as a separate job, or make it an addendum to your existing contract.
  • No substitute. If you can’t do the work, will someone else be able to step in and do it instead? A right of substitution clause in your contract is a clear sign that you’re a true contractor. The implication that the client is hiring you and you alone might cause HMRC to suspect that you’re not a contractor at all, but an employee.
  • Don’t act like an employee. The easiest way to avoid an IR35 investigation is to act like a contractor and not like an employee. Make sure you’re not personally named either in the contract itself, or in any correspondences relating to the contract. Don’t get appraised by your clients, and don’t conduct appraisals of any of their personnel. Never feel the need to ask for permission to take time off. Instead, let your clients know in advance when you won’t be available, and treat this as a common courtesy rather than as a leave request. Make sure you’re not listed in any client organisation charts, refuse a client email address, and use your own business card, rather than one provided by your client’s company. And finally, don’t let your client pay for any training or development.
  • Exclusivity. Exclusivity clauses are common in employment clauses. They’re not necessarily a common part of client and contractor relationships. If your contract with your client explicitly prohibits you from working with other clients, then HMRC might treat it as a red flag that you’re a “disguised employee”. As a freelancer of contractor, you should be beholden to nobody but yourself. Your client shouldn’t be able to dictate who you can and can’t work with. True, they might request that you don’t work for any of their competitors in a given period of time. But anything beyond this might bring your contract inside IR35.

Extra Safeguards Against IR35

So long as you truly are a contractor or a freelancer, and so long as you take care in the wording and the terms of your client contracts, you should never have to worry about IR35. But with that being said, an IR35 investigation may strike without warning. Would your self-employed business be able to cope with the expenses and the interruption that would come as a result of your investigation?

This is why it’s worth investing in legal expenses cover as part of a professional indemnity insurance policy. We’ll cover you for any legal costs that might arise from an IR35 investigation. If HMRC ever open an enquiry into your accounts, we’ll take care of all your legal fees from day one.

We specialise in insurance for self-employed contractors. Our cover starts from just 35p a day, and you can get an online quote in just a minute. Head here to get your free quote today.

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