What is ir35 and Why Should you Care?

There’s no doubt that the financial and labour markets in the UK have evolved considerably since the great recession in 2009, with freelancing becoming increasingly popular in countries such as the UK.

In fact, the freelance economy in the UK has grown by around 25% during the last decade, whilst it now generates a staggering £109 billion each year to the national economy. In total, there are now around two million contractors active in the UK, with these individuals working across an array of industries and sectors.

However, contracting comes with tremendous responsibility, as you must take control of your career whilst also ensuring that you comply with the requisite tax laws. These include the controversial ir35 legislation, which has been in place since 2000 and is set to experience further changes in April of next year.

What is the ir35 Legislation?

Before we begin to discuss the proposed legislative changes in April 2020, it’s important to understand precisely what contractors are required to deal with as part of this legislation. So, what is ir35?

In simple terms, the ir35 regulations were introduced to tackle what HMRC describes as ‘disguised employment’ and associated tax avoidance. 

More specifically, it has sought to prevent contractors from operating as limited companies in a bid to secure sizeable tax breaks, when in fact they work in a way that’s similar to a permanent employee.

In this instance, ir35 allows HMRC to consider these individuals as ‘deemed employees’, creating a scenario where they’ll apply the rules of PAYE (pay as you earn) taxation to freelancers and increase their annual liability.

Make no mistake; anyone caught within the boundaries of ir35 could currently end up paying a staggering 25% more tax, so it’s important to both understand this legislation and prepare for its changes.

What Will Change in April Next Year?

As part of the draft legislation required to enact the Finance Bill 2019/20, the government recommended a number changes for workers who provide services through an intermediary in the private sector (usually in the form of either a sole trader or a limited company).

These changes will take place on April 6th 2020, and the most significant alteration is that the end client will now be responsible for determining whether or not a contractor is operating inside of ir35 rules in the private sector.

In this respect, the new legislation will be consistent with the rules introduced in the public sector in April 2017, whilst it shifts the onus for compliance to the empower rather than the worker.

However, this may actually be bad news for freelancers, as one of the complaints from public sector operators is that they don’t have access to adequate tools when determining whether a freelancer is operating inside the rules of ir35.

Given the potential sanctions for making an inaccurate declaration, many firms have erred on the side of caution by declaring that all freelancers operate inside the boundaries of ir35 and are therefore to be taxed as permanent employees.

In the case of firms such as Barclays and HSBC, freelancers have also been informed that their services will only be engaged if they’re willing to join the payroll on PAYE terms.

It’s hoped that the government will introduce tools to help private sector firms understand this legislation in greater depth, however, whilst as a freelancer you can also help your cause by gathering evidence to support your contracting status.

This can include everything from using a unique email signature to proof of instances in which you’ve been treated differently to permanent staff members, which can be used to both help employers arrive at the right decision and contest an erroneous decision.

The new legislation also makes an exemption for small businesses, meaning that only freelancers who work for medium and large firms will fall under the ir35 guidelines.

The definition of a small business is laid out by the Companies Act 206, and qualifying firms must meet two or more of the following criteria:

  • Have an annual turnover that’s no more than £10.2 million
  • Have a balance sheet value that does not exceed £5.1 billion
  • Employ no more than 50 members of staff

As a contractor, it’s worth evaluating the size of your employer to determine whether or not they meet these criteria, as this will have a direct bearing on the viability of your tax status and the precise amount that you’ll pay each financial year.

The key is to be prepared and understand these changes in detail prior to April 6th next year, before taking steps that ultimately safeguard your status and help you to legally minimise the amount of tax that you pay per annum.