A quick recap on what IR35 is:
IR35 is designed to stop an individual doing employee-like work, as a service via their own ‘intermediary’ like a personal services company (PSC), as a way of reducing income tax and employer and employee National Insurance Contributions (NICs).The rules say that individuals doing employee-like work via their own intermediaries are not genuinely self-employed and are ‘disguised employees’. HMRC see this as tax avoidance. This is because of how income tax and NICs are calculated and paid: an individual using such an intermediary can pay less than if they were an employee. For example, a director of a PSC can pay themselves a low salary and take out the rest of the profits via dividends.
Obviously this has a big impact on Freelancers like you, Take a look below to find out what your options are:
So, what should you be thinking about and what are your options? Well take a look:
1) What Should I be doing about IR35 right now?
IR35 is about determining if you are working as a ‘disguised employee’.
So, now is the time to be honest with yourself and consider if indeed you work like an employee, are treated by your client like an employee, and that the only difference is that you are paid via your own intermediary like a personal services company (PSC) instead of PAYE via the client. Think about whether you or the client who decides what, when, where and how the work is done? Think about whether the client’s engaging only you or just someone with your skillset. The more it’s about you, and the more the client controls, the more likely it is that you’re really working like an employee and inside IR35.
It’s not about fighting to stay outside IR35, it’s about acceptance of the fact you work like an employee. If you try to fight IR35 then should HMRC investigate you then you will just have to pay the tax back.
But there is some good news: HMRC have announced that they won’t be applying IR35 retrospectively so choosing to work inside IR35 won’t immediately ‘open you up to investigation’ for any previous roles held before April 2020. So now is a moment where you can really think about how you work and plan the right structure for you moving forward.
2) I have a personal services company (PSC), what are my options for trading as a freelancer after April 2020?
If indeed you do work like an employee then you will end up paying more tax whatever structure you choose (that’s kind of the point of why HMRC are doing this, there’s not getting around that). So the next question for you is really about how to organise your own arrangements as efficiently as you can.
If you are going to be working predominantly inside IR35, it may be simpler for you to join an umbrella company and have your tax affairs handled for you, rather than incur the costs of your accountant managing a more complex tax situation for you. Umbrella companies will charge a fee for their services.
Whether you work through an umbrella or via PSC, you are still a freelancer and can enjoy the benefits of being one, you will simply be taxed via different routes depending on which one you pick.
If you currently work as a PSC and wish to move to an umbrella long term then you will mostly likely need to make your PSC dormant or close it down. (You should talk to your accountant about the tax consequences of doing this, because there are different ways of doing this.)
Freelancers can also work as sole traders, however many businesses do not want to work with sole traders as they are perceived by some as a potential tax risk, so we would strongly advise against this.
3) Will all my future contracts be inside or outside IR35?
The short answer is no. IR35 status is determined on a contract by contract basis, so it is possible to have some contracts inside IR35 and others outside, even with the same client!
4) Are there any exemptions or exclusions from IR35?
Some small businesses are exempt in some cases from the new rules. (This essentially follows the Companies Act rules: to be a small business the client will need to meet two of the following: turnover of not more than £10.2 million, a balance sheet total of not more than £5.1 million and not more than 50 employees. Once small, the client stays small for their whole financial year. For clients who are not incorporated only the turnover test will apply.)
However, this does not exempt the freelancer: if, for example, you work via your PSC, then the liability falls back on you to classify that role and declare to HMRC under the pre-existing IR35 rules. If you regularly work inside IR35 then you need to be honest with yourself and declare inside so that you don’t face a big tax bill if HMRC investigate you.
If you work in an umbrella then you are already paying the right amount of tax and therefore IR35 won’t apply and you have nothing to declare.
Now YOU’VE READ UP ON YOUR OPTIONS…
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