What is IR35?
The IR35 legislation that came into place in 2000 and can affect freelancers/contractors whose status of 'self-employed' is questionable. If the individuals are deemed a 'worker' or a 'disguised worker' then they will be liable to pay taxes including NICs (National Insurance Contributions). The reason that the self-employed community is shaken up by the legislation is because it can have a detrimental effect on freelancer companies from growing their businesses and profits in the future if their status as 'self-employed' is taken away.
The freelancers, contractors or those are self-employed that find themselves inside the IR35 will need to Schedule E taxation and National Insurance (N.I), following deductions for expenses. If effected, these freelancers income will be in the form of a 'deemed payment', following these deductions.
A freelancers limited company may have multiple sources of income coming in. Therefore, if there is a mix of non-IR35 ad IR35 turnover, then they will only have the IR35 rules applied to the turnover that is within IR35, reaping the rewards of regular contracts.
Normal Section 198 expenses may still be claimed. In addition, there is a provision for other intermediary expenses of 5% of a contractor's turnover.
The following expenses can, therefore, be claimed in addition to the 5% allowance:
- Pension payments - either personal or executive schemes
- Business travel - incurred in the course of business duties
- Subsistence - accommodation, meals when away from home
- Professional Indemnity cover
- Benefits in kind - e.g. private medical insurance
It should be noted that training expenses will not form part of this allowance.
We would advise contractors to seek legal advice to determine their position under the new rules. If you are caught by IR35, you may be able to change the way you work (working practices) and use a new IR35 'friendly' contract to help bypass the legislation.
Do you consider yourself self-employed?
The first thing that you will need to make sure to establish is if you are 'self-employed' or just 'employed in the eyes of the HMRC, according to their definition. The ambiguous guideline which helps decide the employment status of the individual do not help the matter as they can cause confusion.
The overall situation or the bigger picture will be looked at by the HMRC when they are investigating individuals and the employment status. So, its in the favour of the individual being investigated to make sure any contracts that are amended reflect on the working practices.
The best outcome for freelancer and the self-employed will be actually seen as self-employed and have their income be IR35-free. Also, if you want to strengthen your position you should look at the pointers which will mean that you lean towards the status of 'self-employed'. These factors should be reflecting on your working practices.
How to beat IR35 and stay outside of it
- You need to be able to present yourself as self-employed. This needs to be in line with the definition of Self'employed that is given by the HMRC. You can do this by having a contract in place which is in IR35 friendly and reflects on the engagement between the parties.
- You might want to move abroad and take on overseas contracts. If you are struggling with IR35 and HMRC then you can escape and leave the country for a better climate where you might be taxed on a fairer basis. However, make sure that you are aware that every country will have its own rules on taxing, which may be equally or even more so complex than those in the UK. If you are seriously considering leaving the UK, you might want to seek advice from a tax specialist on your target destination.
- You might want to consider becoming an employee in order to avoid being a freelancer that is seen as a 'disguised employee'. However, this would affect you in a major way both personally and professionally so its something that will need to take time on to consider. Employment can provide security and it will also mean that you will not have to constantly worry about IR35 and being caught inside of it.
- Although the legislation came into place almost two decades ago, the number of people self-employed in the UK are on the rise. Although, many hoped that the IR35 would be revoked, it's still in place. However, there are ways of remaining outside of the IR35, so you need to make sure you understand and implement them when running your business as a freelancer/contractor.
More on IR35 and on the brief history of IR35.