Since being introduced in April 2000, IR35 has been controversial. In this guide, we’ll let you know exactly what IR35 is and how you, as a freelancer, can avoid ending up on the wrong side of an HMRC investigation.
What is IR35?
The term IR35 itself is shorthand for Intermediaries Legislation. The government perceived that tax and National Insurance Contributions (NICs) avoidance schemes were being set up through partnerships and limited companies, and the new IR35 legislation was introduced to prevent this.
At the time of IR35’s conception, the tax system was vulnerable to abuse. It was easy for workers to change their employment status almost immediately and even though this in itself was never illegal, it was very badly regulated. Employees changed their status to contractors, allowing them to avoid paying huge amounts of tax. As a result, HMRC suffered a large and continued loss of revenue (also known as a revenue leak), which sent them into a panic.
Needing a quick solution, IR35 was launched. However, because of the fast turnover, the legislation didn’t receive proper testing or a realistic launch schedule. Issues with this legislation began to impact the livelihoods of genuine contractors and freelancers, with many having to contest HMRC’s decisions to continue practicing their profession.
Why should I worry about IR35?
Pete Willcocks, MD here at Larsen Howie, has been following IR35 since its inception. He says: ‘Many are fearful of being classified as inside-IR35 and losing a chunk of their take-home pay, or even being crushed by a retrospective tax bill - a worry not unwarranted after HMRC were caught encouraging NHS bosses to make blanket inside determinations to save on time.’
This is why on the 6th April 2018, when the reformed IR35 rules came into effect in the public sector, there has since been a substantial drop in freelancer and contractor numbers working for major employers, like the BBC or NHS.
Although this is concerning, it doesn't mean you have to give up freelancing or contracting altogether. Make sure you have iron-clad proof that you are not an employee, and you should be just fine if investigated. Identifying IR35 risks may seem tricky, but there are steps you can take to reduce your chances of being targeted.
How do I make sure I'm not considered an employee under IR35?
While these steps are loose guidelines and you should always seek a professional opinion if you’re fearful for you employment status, you should be okay if you do the following:
Control your own work
As a freelancer, your client shouldn’t tell you how to work.
If this is the case with your client, their authority suggests that they have the same control over you and your work as they would with their own employees. This is why it's important to ensure that as a contractor you are given a set of deliverables instead, and then left to complete the work independently of the client or company.
This is particularly pertinent in the public sector. For example, it can be difficult to avoid this when working for national corporations like the NHS and BBC – Christa Ackroyd’s ongoing case is testament to how HMRC targets the self-employed in the public sector.
Keep it professional
Make sure your contract clearly specifies that the client or agency is hiring your company, not you as a person. Your company should be the provider of your services, at all times – this is extremely important to get right.
This is one of the main arguments being used against Eamonn Holmes in his IR35 case.
Don’t do any favours
While it may seem stingy to turn down small tasks that the client requests in addition to your main contracted job, this behaviour could actually get you into IR35-related trouble. Any work outside the scope of your contract could be interpreted as client control – i.e. that you’re actually employed by them.
This is a common problem in role-based (as opposed to project-based) freelance positions. These lines are easily blurred so you should take extra care if this applies to your work.
Avoid long goodbyes
A big drawback to freelancing is you don’t have employee rights. Therefore, including a long termination clause as part of your contract may imply that your client is obligated to give you work, and that you’re obligated to complete it. This is called mutuality of obligation, or MOO.
This is particularly apt for business consultants and IT contractors who work on projects that can be postponed or cancelled altogether on a whim. Although it’s understandable to want protection from the effects of an unstable income, unfortunately that kind of safeguarding is synonymous with having employee rights.
Keep timings flexible
If the client is contractually obliged to provide a set amount of work per week and you’re obliged to do that work for a set amount of hours, that’s very much an employer-employee relationship.
You can, however, include an ‘estimated hours per week to deliver the services’ clause. This could prove especially useful for public sector workers who may feel budget cuts – and the effects of Brexit – first.
No uniform, no problem
That old adage ‘dress for the job you want’ is important to remember here. If you are a freelancer or contractor acting like an employee by wearing an employee name badge or company uniform, HMRC will class you as an employee.
While it may not affect a preliminary IR35 investigation, it could well swing a judgement. This is a trap many freelancers and contractors fall into when working for large (mostly private) corporations.
Andy Vessey, our Head of Tax, specialises in IR35 rulings. He states: ‘Much of protecting yourself from an IR35 investigation is common sense. Don’t take part in a work appraisal, don’t accept payment for time off sick or annual leave and don’t start contracting for a former employer immediately after making the change. Avoid anything that would make you a typical employee of a company - HMRC will be looking for you to prove that you’re NOT an employee. ’
You can read more about HMRC’s determination process here but there are plenty of small changes you can make to your working practices and contract to ensure you don’t fall foul of the taxman. We offer a range of contract reviews and IR35 investigation insurances that are invaluable for peace of mind.
If you’re interested and would like to learn more, we’d love to hear from you. Call us on 01163 800 400 or email if you have any questions about IR35 risks, or explore our Knowledge Hub for further articles.