The world of self-employment and tax is a crazy one at the moment. One minute you think you’re going to be paying extra dollops of national insurance, and the next you’re part of a huge U-turn. It’s all you can do to keep up.
While the government works out what they want to do, we thought we’d take a bite of that other freelance hot potato: intermediaries legislation. We’ve covered IR35 before, but as things become a tad clearer, it seems the right time to look more closely at what might constitute “in” or “out”.
Why is this important? IPSE has summed the problem up neatly here:
“Also known as the “intermediaries legislation”, IR35 is intended to stop “disguised employment”. This is where employers engage their employees through limited companies, thus avoiding the need to pay Employer’s National Insurance Contributions, Sick Pay, and Holiday Pay, with the disguised employee also potentially able to benefit from a reduced tax bill.”
Since HMRC aren’t keen on this happening, they need to determine the nature of your relationship with your employer. As IPSE puts it, “IR35 taxes the fees paid to limited companies in a manner similar to a salary where HMRC believes disguised employment is occurring.
For IR35 to apply, HMRC has to determine whether the relationship between a freelancer and their client is in fact an employer-employee relationship, by referring to a number of complex and subjective tests established in case law.”
Since the “complex and subjective tests” are unclear, it’s very hard to predict whether a freelancer is going to find themselves inside or outside IR35. After some head scratching, we’ve put together a few ideas that may help you to make your position clear.
- It’s a good idea to make sure you have a freelancing contract in the first place (unfortunately, many of us don’t bother).
- Make sure that your contract states clearly what you are doing and the services you are providing. As a freelancer, a company is unable to make you do anything that hasn’t been previously agreed in your contract, which is not the case as a regular employee. (It may sound obvious, but make sure that you are clearly doing something that a regular employer can’t. It wouldn’t look good for the IR35 people to find you basically working as a regular part of the team.)
- Include in your contract some mention of your contract term being an estimate. If you have a contract for six months, make sure it’s ‘approximately’ six months. As the end of your six months approaches, terminate it a week early. Again, this is only possible as a freelancer, rather than as an employee, so it would further demonstrate the nature of your relationship.
- Insert a substantiation clause, suggesting that if you are unable to do the work, you are able to suggest someone to take your place. The client will have final say on that person. While this is unlikely to happen, it again demonstrates that the nature of your working relationship is outside any provisions set out in IR35.
- Show that you’re outside IR35 by holding your client to payment deadlines agreed in your contract. Employees are very rarely paid late, but chasing late payments is the bane of the freelancer’s working life. If you have examples of your written complaints, this can be taken as an example of your working relationship.
- If you’re charging VAT (something a regular employee would never do), make sure that your intent to do this is declared in your contract.
- Pay for your own travel. Again, this is not something that regular employees do – they always charge travel expenses to the company. By being able to demonstrate that you travel to various clients, and that your own ltd company (or sole tradership) pays for it, you are ticking the right boxes.
No, we’re not talking about makeup supplies. However, we are talking about appearances. There are certain traits common to the freelancer that regularly employed workers don’t display.
- Build yourself a website advertising your services. A regular employee would have no need for such a thing, but it’s an essential part of the freelancer’s marketing toolkit.
- Use your own computer and, if you can, find the receipts to show you bought it yourself or as part of your own company.
- Use an email that includes your own company’s name. Similarly, have your own business cards made up.
We should note that these methods are not a guaranteed way of escaping IR35. However, many of them are natural to the way an honest freelancer would work anyway. While your mum always told you never to judge a book by its cover, in the case of IR35 inspectors, we suspect that appearances will count for quite a lot. Better to be safe than sorry, eh?