If you’re self-employed, you work for yourself. If you’re an employee, you work for someone else. HMRC has different tax rules for self-employed people and for employees. But the line between a self-employed person and an employee can often be very thin.
HMRC introduced the IR35 system as a means for assessing whether an individual is genuinely self-employed, or whether they’re a “disguised employee”. But for various reasons, some people work for one company on a self-employed basis. What does the law have to say about this?
What is IR35 and “Disguised Employees”?
For every person a company employs, they have to pay certain taxes while making contributions to pensions and National Insurance. HMRC worried that some companies were treating employees as self-employed contractors as a sneaky means of avoiding having to make these payments on top of a salary.
IR35 is HMRC’s system for differentiating between the truly self-employed, and these “disguised employees”. You can read our complete guide to IR35 and what it covers here.
Self-Employed & Working For One Company
One of the many problems with the IR35 system is that, on the surface, it seems to assume that there’s a clear line between a self-employed person and an employee. You’re either self-employed, working for yourself, or you’re an employee, working for a company.
But of course, in reality things might not be that simple. It’s pretty common to be self-employed and working for one company. Maybe you’ve got a close working relationship with a single client. Maybe you’re involved with a large project that’s taking months or years to complete. Or maybe a single company makes extensive use of your services each month, meaning you have neither the time nor the necessity to seek any additional freelance work.
In each case you can still be, to all intents and purposes, a self-employed worker. Yet if all your work comes from a single source, you’re technically working for one company. So how does this sort of situation affect IR35 status?
IR35 & Working For One Company
As we have seen, there may be a fine line between being self-employed and being an employee. But there are certain things that can make the distinction clearer:
- Independence – It bears repeating once again: If you’re self-employed, you work for yourself. You are your own boss. But if your client is able to define your working hours, to dictate exactly how your work must be completed, and to require you to attend routine meetings, then HMRC might view you as employed rather than self-employed.
- Obligation – If you’re self-employed, once you’ve completed a project, you have no obligation to continue working for a client. At the same time, the client has no obligation to offer you more work.
- Substitution – What would happen if you’re somehow unable to complete your work for the client? Can you send a substitute in your place? Or does the client want you? In other words, does the client have a task they need completing, or a task they want you specifically to complete? If it’s the former, then HMRC may view you as a self-employed contractor. But if it’s the latter, then they may class you as an employee.
You can read more about the practical implications of IR35 rules.
How to Avoid IR35 Investigations
You can safeguard yourself against costly HMRC IR35 investigations if you behave more like a self-employed person, and less like an employee.
Here’s some ways you can achieve this:
- Avoid contracts of employment. Instead, establish contracts with your clients on a project-by-project basis. Think of ways you can incorporate the factors we listed above into your contract: Independence, obligation, and substitution.
- Stay independent. Maintain your own website, print your own business cards, and continue to market yourself as a self-employed contractor.
- Don’t act like an employee. Don’t let the company list you on their “meet the team” page, or in company brochures. If they offer you business cards, an expenses account, a company car, or anything else like this, politely turn them down.
On top of all this, insurance can cover your legal expenses in the event of a HMRC investigation. So no matter what happens, you’ll always be able to continue trading, and you’ll never have to worry about insolvency.
At Tapoly, we specialise in providing comprehensive and affordable insurance for self-employed workers. Our flexible tailored cover starts at just 50p a day, and you can get a free quote online in minutes. Head here for more information.