INDIVIDUALS

IR35 For Freelance Contractors

Understand your position

Don't get caught out. Be prepared!

It may seem like it’s the clients who have to do all the preparing, to be able to carry out IR35 assessments and then deduct income tax and NICs for those contracts which are assessed as inside IR35. But, the impact of these changes will affect all contractors.

For example, for each contract that you do, you will need to go through whatever administrative processes the client has implemented to carry out the assessment – some clients may only assess the contract, but others may be more collaborative and involve you responding to questions too.

For contracts you do for small clients, you will remain responsible for carrying out the assessment in the same way as the rules work now.

So, you will end up with a mix of assessments, and (depending on your clients and how they engage you) a mix of inside and outside IR35 contracts.

The details of the changes are not finalised yet and the Government has just finished a consultation - if you want to read it, you can see it here. We won’t get the granular ‘black letter law’ as part of the Finance Bill until some time in the summer, but the experiences of the public sector and the responses to the consultation mean that what’s rolled out in the private sector won’t be an exact match for what the public sector have experienced. For example, there are likely to be new rules on information flow and mechanisms to encourage better conversations between clients and contractors if there is a disagreement about what the correct IR35 status should be.

What to think about now

When the similar changes were first rolled out in the public sector we saw users of contractors pay A LOT more attention to the requirements of IR35 and we fully expect this will happen in the private sector too. It means that the process of agreeing assignments with your clients will change - the client will need to do a full IR35 assessment as part of the brief process. Depending on the assessment outcome, how you are paid will change.To get yourself prepared for the upcoming changes here are a few things you can do:

1. Understand how the rules work

Start off by taking the HMRC IR35 test, which will assess your current work practices to see if your current contracts would land inside or outside IR35. Become familiar with how it works and the sorts of questions it asks. There is also a lot of guidance provided by HMRC which will help you making your own assessments when you need to (for example, for a small client).

2. Understand how you deliver your services to clients right now

To stay outside of IR35 (if that’s your priority) you need to be sure you are operating like a ‘business’, not a ‘disguised employee’. Do sell your services on a time or project basis? Do you deliver your services on-site, off-site or a mix of both? Do you have multiple projects on the go at once or are you dedicated to one client at a time? How embedded are you in a client team or are you fairly independent in the way you work (times, equipment, etc)

3. Understand what it is that the client is buying when they engage you

Does the client engage a certain skillset, or are they engaging a specific person (and only that person will do!) One key factor in operating like a business is whether you can send someone else in as a substitute for you to complete the services.

4. Understand who your clients are

When we surveyed over five hundred freelancers on YunoJuno we found that the vast majority of you went freelance for the freedom to work on different clients and projects. So, understand who your clients are and consider how much variety there is there.

5. Understand what you look like to the outside world

Do you have your own brand, marketing materials, website/portfolio/GitHub, etc? Do you look like an independent contractor?

6. Understand what your contracts say

What terms are they between you and your clients? Do you look like an independent service provider or more like a temp?

What are the risks for non-compliance?

To a large extent, there have always been IR35 risks for you and your PSC. From April 2020 some of these risks will remain with you, and some will transfer to clients.

However, if you misclassify yourself, or are complicit in a client doing so, there is a risk that HMRC will launch an investigation. This can result in back taxes due, penalty fees and interest charges, alongside the time costs and legal fees for you and/or the client.

Beyond this, if it is discovered that you helping clients deem contracts outside IR35 without them taking reasonable care (for example, on purpose to avoid payments), then you could be accused of facilitating tax avoidance, which is punishable under the Criminal Finances Act. So it's in your interest to be prepared!

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