Can I freelance for my employer while covid-19 keeps disturbing demand?

Freelancer’s Question: Can I switch from permanent employment at my current employer to being a full-time freelancer for them? I would look for new, additional clients if that would firm-up my position? Are there considerations other than clientele I would need to make? The employer is leaning towards a freelance workforce due to the covid-19 pandemic still causing demand to fluctuate unpredictably.  

Expert’s Answer: Switching from employment to freelancing is entirely possible with the right contracts and preparation. 

But switching to a supply of services, through your own company which you would set up, is really only going to be financially beneficial to you if you can ensure that the status of your engagements are going to be outside IR35. That’s because if you were within IR35, then your income would be taxed much in the same way as your employed income is currently.

Whose IR35 decision is it anyway?

At present and since April 2017, in the public sector, it is the end-client’s decision whether IR35 applies and, as Thursday’s Summer Economic Statement by chancellor Rishi Sunak confirmed, this will be the same in the private sector from April 2021.

Whether IR35 applies depends on what your contract says. It also depends on what your working practices are in respect of three fundamental criteria:  Personal Service; Mutuality of Obligations; and Control.

The law says an employee is someone who must provide their own personal service; is controlled by their engager; and is obliged to undertake work for their engager, who is equally obliged to provide work for them.

The more of this trio is on your side, the better

Therefore, in order to establish that employment does not exist (i.e. the engagement is outside IR35), you would need to demonstrate a lack of one of these obligations -- so a lack of personal service, a lack of control or a lack of mutuality of obligations. The more of these that you can demonstrate do not exist, the stronger your outside IR35 position will be. 

We would therefore recommend, particularly when switching from employment to freelancing, that the contract and working practices demonstrate that you have the right to provide a substitute to carry out the services; that you are not subject to control as to how you provide the services; and that there is no obligation for the services to be provided. 

What the taxman would scrutinise

In general terms, HMRC would also look to see there is a significant difference between the employed engagement and the new freelance engagement – at the very least make sure that the contract is not (still) titled “contract of employment!” Importantly, it would need to be an ‘arm’s length’ commercial agreement which demonstrates that your limited company is exposed to commercial and legal risks of contracting, and covers its own expenses of operation; i.e. that it is independent of the engager.

You mention clientele. The number of clients a company has is not a determinative factor in law. Practically, however, if you do have more than one client, then this would help to show to HMRC that you have a wider commercial presence.

If in doubt...

Finally, we would always advise anyone to seek professional advice on their contracts and working practices to ensure they are confident of their position from the outset (and in advance of any HMRC enquiry). Good luck!

The expert was David Harmer, associate director of contractor solutions at Markel Tax.