On 6th April 2020, changes to IR35 are expected to bring with them a whole lot of change for the contractor community.
There’s plenty of chatter about how IR35 legislation will affect contractors and herald the end of the contractor relationship. But let me share 2 facts about it with you.
1. It’s not new. It’s been around and applicable to contractors like you since 2000 – that may be even before some of you were even born!
2. Many contractors and freelancers are likely to remain completely unaffected by this. That’s right – the 6th April will have an impact on the contractor market, but it won’t bring with it an apocalyptic tidal wave that will stop all freelancers in their tracks.
What is IR35 and what’s the panic?
For many years, people have been choosing to work as contractors, while being managed as employees. So they received equipment and a place of work from their employing organisation and benefited from a lower tax rate.
IR35 was introduced in 2000 to enable the government to claim taxes from employees who were masquerading as freelancers.
Contractors were responsible for determining whether they were in fact employees or genuinely independent contractors.
Determining the nature of the relationship was based on the actual working relationship between two parties – from how they were managed, to where they worked and how they were kitted out with equipment such as PCs, laptops and phones.
IR35 legislation (also known as Intermediaries Legislation) was applicable to all contractors in all sectors. However, with many contractors not declaring themselves to be inside IR35, the government was still missing out on millions of pounds in revenue.
In 2017, the legislation was updated. Where someone was employed by a public body, the responsibility for assessing whether an individual was an employee or a contractor was transferred to the employing organisation.
As of the 6th April this year, this transfer of responsibility for determining whether a contractor falls inside or outside of IR35 also moves to employing bodies in the private sector.
What does IR35 mean to a freelancer?
Contractors and freelancers have always needed to be mindful about whether their contract falls inside IR35. However, from April 6th, the assessment will be carried out by the employer to determine whether a contract is really representative of a contractor or an employee relationship.
If you are assessed to be an employee, you’ll be subject to NI and tax deductions taken from your pay. You’ll be entitled to other employment benefits such as sick pay, career development opportunities, company pension contributions and holidays, but you’re likely to end up with fewer pennies in your pocket at the end of the day.
Some organisations with deeper pockets are boosting day rates to minimise the impact on contractors, but many companies don’t have the capacity to do this, which means it’ll be contractors that miss out.
However, don’t go rushing for your employment contract just yet. It’s quite possible that your contract won’t fall within the IR35 legislation.
Who’s exempt from IR35?
If end-client is considered a small or medium company your contract won’t fall within IR35. The Companies Act 2006 defines these companies as having:
- an annual turnover of less than £10.2 million
- a balance sheet total of less than £5.1 million
- fewer than 50 employees.
If the company you contract for doesn’t meet two of these criteria, the question of whether IR35 should apply gets a little more complicated.
The indicators around what constitutes an employee haven’t changed since the original legislation was brought into force in 2000. There are quite a few of them, including but not limited to:
- the amount of supervision, direction, or control your employer has over how you carry out your role or task
- whether you can send someone else to complete a project or task in your place
- whether the organisation you are working for is obliged to offer you work – and whether you are obliged to accept it
who supplies and owns your equipment
- whether you have any financial risk should a job not work out
- whether you are paid monthly, at certain milestones or on completion
- whether you have a team reporting to you
- the actual intention of yourself and the employing organisation
- whether you run a business, carrying out all the typical business tasks such as invoicing, enticing new customers and completing accounting and reporting tasks
As you can see, it gets a little complicated. OK, it’s more like a navigating a rabbit warren with your eyes shut and your hands tied behind your back
Helping you determine whether you’re inside IR35
The responsibility for determining your status lies with your end-client who, once they have conducted the assessment, will issue a Status Determination Statement which will let you know the IR35 assessment outcome.
If you want to look into your status in the meantime, the Government created a tool called CEST (Check Employment Status for Tax) in 2017. This online tool was designed to help employers determine which contracts fall inside of IR35 and which don’t.
Over the years, the tool hasn’t done much to clarify the situation – CEST-based decisions have been overturned by judges in tribunals.
However, at the end of last year, CEST has faced some serious plastic surgery with over 39 algorithm changes to make its decisions reflect more closely those that the courts are reaching. The effectiveness of these changes remain to be seen.
Anyone can use the CEST tool to determine their own position, however, you’ll need to complete it from the employing organisation’s perspective and you’ll need to know:
- the contract details
- your responsibilities
- who determines the work
- who decides where and when work is carried out
- how you’ll be paid for your work
- whether you’ll receive any other reimbursements such as benefits, company car or equipment etc.
What should I expect if my contract falls within IR35?
If you find that your contract does fall within IR35 (and therefore you’re really an employee), there are two things you can do.
Firstly, find out if your employing organisation will agree to you changing your contract, and your working relationship, to one that genuinely falls outside of IR35.
Or, you can sign an employment contract with your employing organisation before the legislative changes come into force on the 6th April 2020.
It’s essential for contractors to understand what IR35 is and why it exists, especially when embarking on future commercial relationships. But if you’re genuinely an independent freelancer IR35 will pass largely unnoticed.
I’ve done my best to bring summarise the IR35 changes due this year, but I’m no lawyer. So, if you are concerned about whether or not your contract falls within IR35, consult the CEST tool. Or speak to a legally qualified advisor to find out about how to transfer to employee status.