A Guide to IR35
Inside Determinations & Payments
A Guide to IR35
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. IR35 is only relevant if you are operating through a Limited Company, it is not relevant to freelancers operating as a Sole Trader, or through an Umbrella.
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 me 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.
In preparation for this, you will need to complete some IR35 questions in your Worksome account, which will be used as part of any IR35 determinations on your contracts.
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 my contracts?
No, HMRC state that if your End Client does not satisfy at least two of the following conditions, 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 a balance sheet total of more than £5.1 million
If you are hired by a business with 50+ employees
If your End Client is part of a larger group of companies then the aggregate position of the group must be considered when applying the ‘small companies’ exemption. This could mean that your End Client is defined as small, as per the Companies Act 2006 definition, but they will still need to apply the IR35 reforms.”
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 me 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.
Where do I add my IR35 answers in Worksome?
If you are a freelancer operating through a Ltd company, you will need to complete some IR35 questions in your Worksome account, which will be used as part of any IR35 determinations on your contracts. Follow our guide here, to add your settings.
Inside Determinations & Payments
My contract has been deemed Inside IR35 through my LTD company (PSC). What happens now?
If you're offered a contract in Worksome that is deemed inside IR35, then you'll be paid "PAYE" through Worksome. This means we'll be responsible for deductions of PAYE tax and NICs to your pay.
To accept your Inside IR35 contract, you'll first need to complete some settings in your account.
Firstly (if you haven't already) you'll need to confirm your agreement to be paid PAYE in your Freelancer Settings below:
This will then unlock some PAYE settings for you to complete. You'll need to fully complete these settings, in order to receive any payments on this contract:
What should I input as my Starter Form answer?
In your PAYE settings, you'll see you have a Starter Form question to answer, to let us know your current employment status.
If you are unsure of your starter form answer, we would recommend speaking with HMRC or your accountant to confirm. As what you input here will be used on your payroll with us, and will affect your tax deductions, because you will be assigned a tax code based on your answer. So if unsure, check with the experts just to be sure! 📝
Your tax code dictates how much income you can earn before paying tax and is therefore very important to ensure the right amount of tax is deducted on your payments. We will infer a tax code for you based on your starter form answer, so that for the time being you can receive your payments until HMRC potentially issues you a new or corrected code. Any discrepancy with the amount of tax you pay will be corrected when HMRC issue a new tax code for you. Going forward you can always refer to your latest Worksome payslip for your most recent tax code.
How will my Inside IR35 payments work from a tax perspective? Should I be paid into my LTD or personal bank account?
If you are offered a contract in Worksome that is deemed inside IR35, then for any bills submitted on this contract, you will be paid PAYE through Worksome.
All payments will be made to the entity you use to engage Worksome. This means if you are engaging through your LTD on a contract, then we must pay you into your LTD bank account. This will be case for any contracts deemed inside IR35 on Worksome.
Employment taxes/NIC’s will be taken from your income, just like an employee, but the contracting party is still your Ltd company so this is where payments will be made to. This is technically known as ‘employed for tax purposes’ and HMRC recognise us as your ‘deemed employer’.
Don’t worry as you will not be taxed twice. When withdrawing the income from your company it should be taken as a ‘deemed salary’ with no tax or NIC’s applied. This ensures the business costs are the same as your business expenses so with no profits to speak of, there is no corporation tax to pay.
Your accountant will be able to provide greater detail on this and fully explain the concept. But to assist you further, HMRC have provided guides in the Employment Status Manuals, which you can find below:
Can I still bill with VAT?
Any freelancer operating through than an LTD that is VAT registered, should invoice for VAT. You need to tell us whether you are or are not registered for VAT in your Worksome business entity settings below, and we then will automate this setting onto any future bills you submit in Worksome:
If you are on an IR35 payroll with us, and advise that your LTD is registered for VAT, Worksome will then pay you the net amount of your bill (after employment taxes/NIC’s/app levy are deducted), plus the full VAT amount.
You will still submit your bills as normal. But how it is paid to you will differ slightly, as it will be split into 2 payments:
- The VAT amount will be paid into your Worksome balance (as it's not subject to any payroll deductions)
- The non-VAT amount is paid directly to your bank account (after deductions)
If you have any queries on this, please don't hesitate to contact Worksome Support.
Who is my employer - Worksome or my client?
If you're pay-rolled through Worksome, we will be your employer.
What will my Deductions be if my contract is deemed inside IR35?
If you are working on a contract in Worksome that is deemed inside IR35, you would be paid PAYE by Worksome which means we would be responsible for deducting employment taxes & NI contributions on your payments - the standard tax brackets for your employee deductions can be found on HMRC's website.
Depending on your client, we may need to deduct further employer costs of 14.3% from your Charge Rate. This calculates as the Employers NI at 13.8% and Apprenticeship Levy (AL) at 0.5% and would in effect reduce your Booking Fee. These standard PAYE deductions, as per HMRC, are the same deductions you would incur with any Umbrella company.
Whether or not we have to deduct these employer costs, will depend on the client you are working with. Some clients are willing to cover the cost of employer's contributions, and others are not. So it will entirely depend on your client, and their approach to their Inside IR35 contracts.
You will have full view on the IR35 determination result, and estimated deductions before you accept the contract. You'll receive a 'KID' (key information document) with any Inside IR35 contract offers, which will provide you with an estimated financial breakdown from your bill rate to an anticipated net pay, and will detail all expected deductions as above:
When I submit a bill, when will I be paid?
You will be paid as per the contract payment terms with your client. You can find this in your Worksome contract for the job, under "payment terms":
How does sick pay work?
You would receive statutory sick pay at the government stipulated rate of £95.85 per week (£19.17 per day) from the 4th consecutive day of leave. The UK government does not refund this cost making it an additional charge to the employer and is why all Umbrella companies operate this way.
How will my Pension contributions work?
After 3 months of working with Worksome on payroll, we are legally obliged to auto-enrol you into a company pension plan. Our chosen pension provider is the government backed NEST. Should you choose to, you can opt out of NEST and the process to do so will be in their enrolment letters they will send you upon enrolment.
Can I contribute to my own personal pension through Worksome?
It will not be possible for us to contribute to your private pension as it would be impossible to manage multiple pension funds. But if you choose to, you will be able to opt out of NEST, which will be detailed in the letters you will receive from them upon enrolment (after 3 months of being on payroll through Worksome).
How does Holiday Pay work when on payroll with Worksome?
As a contractor worker, you are an employee of the umbrella company who is payrolling you (in this case, Worksome).
As per UK law, all payroll employees are entitled to 5.6 weeks paid holiday each year. This amounts to 28 days for contractor workers (5.6 times the standard working week of 5 days = 28 days.) If you work fewer days per week, or for just a few months out of the year, for example, then your holiday pay entitlement would be calculated on a pro-rata basis.
For contractor workers, the percentage typically used to calculate holiday is 12.07% of your hourly rate.
(5.6 weeks of holiday allowance ÷ 46.4 working weeks = 12.07% of your gross taxable pay set aside for holiday)
For example, if your taxable pay each month is £2000, the holiday pay accrued each month would be £241.40 (12.07% of £2000) and would be detailed on your payslip as such. This is essentially a payment in advance of the actual weeks you may take your holiday, and means that you are constantly up to date with the money you are entitled to for holiday pay.
How is the Holiday Pay transferred to me?
Holiday pay is calculated at 12.07% of your hourly rate, as detailed above.
In the same way that many Umbrella companies operate, Worksome will ‘roll up’ your holiday pay into your ordinary salary calculations, as part of your monthly payment. Therefore it is subject to income tax & NI deductions, just like the rest of your salary.
This will be detailed in the monthly payslip you'll receive once you're on payroll.
If you have any further queries about how holiday pay works for contractor workers, we would recommend speaking with your accountant. The rules with HMRC are complex, and your accountant would be able to advise you clearly on how holiday pay works when on payroll.
How do I 'book' Holiday days?
The simple answer is, you don't 🏖️ On PAYE, you receive holiday pay as part of your salary, as outlined above, which means you are constantly up to date with the money you are entitled to for holiday pay.
Since you have already been paid for holiday, you should not enter any holiday dates dates on your timesheet or bill in Worksome when taking a day off.
My payslip shows an Apprenticeship levy, and I'm not an apprentice. What is this for?
Apprenticeship Levy is a tax charged to all companies whose annual gross payroll amount is greater than £3M. As Worksome fulfil this criteria we have to charge this tax.
How does Expenses work when on payroll?
You can submit your expenses to your client in the usual way. See our guide to submitting expenses here.
When you are on payroll, you will be paid gross for any expenses, since these are not subject to any tax deductions.
Do I get paid holiday/vacation days when I work a contract through my LTD (PSC) inside IR35?
Not by Worksome or the client as you are still employed by your PSC so it will be liable for your holiday allowance
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.
If you disagree with the IR35 determination result, and can produce material evidence to support your grounds for a revised determination, you can file a dispute. Follow the guide below:
Procedure for disputing an IR35 INSIDE determination
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 with 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.