What is IR35?
IR35 has been around for two decades, and designed by HMRC to make sure freelancers are paying the correct level of tax. Also known as the ‘intermediaries legislation’, IR35 is UK tax legislation that is relevant when a freelancer delivers their service through a Limited Company that they own a material interest in.
Using specific ‘IR35 determination’ criteria, HMRC wish to identify freelancers who are employed for tax purposes were it not for their use of an intermediary, such as a Limited Company setup, in the supply of their service.
This criteria is tested by both parties (the hiring company and the freelancer) answering and agreeing to a set of questions, which HMRC then uses to decide whether or not the payments should be taxed or not.
What does IR35 mean for you as a freelancer?
It means you’ll have to be aware of, and maybe change, how you get paid. From April 6th 2021, all freelance projects that are engaged through a Limited Company need to be tested against the IR35 regulations.
Payment for projects that are ‘Inside IR35’ will need to be taxed at source, with PAYE and National Insurance Contributions (NICs) taken from the freelancer’s billed rate.
Those that are ‘Outside IR35’ will be paid gross, and as such will be able to determine when and how their company profits are distributed, which might allow them to benefit from efficient tax planning.
So why is this important?
It’s the law, so it’s quite important everyone complies. Hiring companies will have to complete an IR35 assessment for every freelance project, and freelancers will have to assist them by answering a few questions about their work environment, all of which should be completed before the assignment begins.It's another step in the process, but Worksome makes this super easy for everyone.
Do the IR35 reforms apply to all of your contracts?
No. HMRC states that if your End Client does not satisfy at least two of the following, then the reforms will not apply and you will continue to be responsible for determining your own IR35 status:
- If you are hired by a business with an annual turnover of more than £10.2million
- If you are hired by a business with has a balance sheet total of more than £5.1million
- If you are hired by a business with 50+ employees
You are also exempt if you are a freelancer that is not a UK tax resident and do not pay UK tax.
For more on these exemptions, head to the HMRC website guidelines here.
What’s the risk for freelancers?
It can be pretty big. From 6th of April the main risks of non-compliance will be transferred away from you and moved up to the supply chain. HMRC will be keen to claw back any tax that it thinks it’s owed from, which could mean a long lawsuit, a lot of stress, and a hefty fine. All of this will be aimed at the business who engaged you and/or your hirer.
How can Worksome help you as a freelancer?
We’ll make it simple and fair. With Worksome, when relevant companies (large enough to have to adhere with IR35) post their projects, they will each be determined as ‘Inside IR35’ or ‘Outside IR35’ so you know what you’re getting into before you accept any contract.
Questions to make the IR35 determination will be answered by both the hiring company and you (the freelancer) in the Worksome platform. Worksome does not answer these questions for either party.
Once again, ‘Outside IR35’ will be paid as usual, and ‘Inside IR35’ incurs deductions of PAYE tax and NICs to your pay.
Can I challenge a project deemed ‘Inside IR35’?
Yes. Under any circumstance you can challenge the decision but we expect that if you’re deemed Outside IR35, you’ll be rather happy. Therefore, those determined as Inside IR35 will be able to submit your dispute within the Worksome platform, who work with tax advisors who will review your dispute and resolve it quickly. Legally, and at any time throughout your assignment, you can lodge a dispute and this must be resolved within 45 days. But through Worksome we aim to conclude this within an estimated 48 hours.
Is there anything freelancers can do to be ‘Outside IR35’ every time?
Each assignment will be judged on its own merits so there isn’t a one size fits all approach. However, IR35 is not trying to punish the truly self-employed so there are things you can do to support this. Professional insurances, marketing costs, concurrent projects are examples of what you would expect to see from a self-employed worker. The same can be said for working remotely, using your own equipment and rectifying mistakes at your own cost.
Does Worksome insure IR35 determinations made in the platform?
Yes. All status determinations made post-6th April under the new reforms are underwritten by a Fee Payer policy that protects against future HMRC investigation and/or additional tax liabilities. This means that projects deemed 'Outside IR35' from the questions answered by both parties using Worksome will be covered, should HMRC ever challenge the payments.
What’s the alternative to managing this process with Worksome?
HMRC has a Check Employment Status for Tax (CEST) tool, containing lots of questions to be manually answered for each freelance project. You will likely come across this assessment a lot with companies sadly not yet using Worksome. In around 20% of cases CEST is unable to determine whether an assignment is Inside or Outside of IR35. It’s a labour intensive tool that does not integrate with third party software. It also relies on the user understanding IR35 in order to obtain any meaningful decision (which sadly isn’t always going to be the case).
Luckily, Worksome has qualified tax specialists in-house, plus our platform uses the data produced in the hiring process to answer the majority of these without you having to lift a finger. Technology, eh.
Need help? Get in touch!
If you would like to find out more about how to determine your projects as ‘Inside IR35’ or ‘Outside IR35’, please email our team at email@example.com.