For the purpose of this guide, we’ll be referring to all freelance, contract and contingent workers as “freelancers”.
What is IR35?
IR35 is UK tax legislation. It's been around for two decades, and designed to make sure freelancers are paying tax.
Using an ‘IR35 determination’ for every contract, HMRC wants to identify freelancers who would be employed for tax purposes were it not for their use of an intermediary, normally their own limited company, in the supply of their service.
What do the IR35 reforms mean for an employer?
It means you’ll have to be aware of, and occasionally change, how you pay freelancers. From April 6th 2021, all freelance projects that are engaged through a Limited Company need to be tested against the IR35 regulations - so that freelancers are actually working as a project-based freelancer and not a disguised employee (or ‘Inside IR35', often called a ‘permalancer’ or a long-term contractor with no set deliverables and employee-like benefits).
‘Inside IR35’ means that freelancers will need to be employed for tax purposes and have PAYE and National Insurance Contributions (NICs) taken at source .
‘Outside IR35’ means that employees and freelancers can work on the project as usual and be paid gross.
So why is this important?
It’s the law, so it’s quite important everyone complies. Employers will have to complete an IR35 assessment for every freelance project, and freelancers will have a few extra questions to answer as the project gets going. It's another step in the process, but Worksome makes this super easy for everyone.
Do the reforms apply to all employers?
No. HRMC state that if any two of the following apply, then your company has to comply:
- If your business has an annual turnover of more than £10.2million
- If your business has a balance sheet total of more than £5.1million
- If your business has 50+ employees
For more on who this applies to, head to the HMRC guidelines here.
What’s the risk for employers?
It can be pretty big. HMRC is keen to claw back any unpaid tax revenue that it thinks it’s owed from all parties. It could mean a long lawsuit, a lot of stress, and a hefty fine.
How will Worksome help with this?
We’ll make it simple. With Worksome, every project can be deemed ‘Inside IR35’ or ‘Outside IR35’ within minutes.
When posting a project or creating a contract in Worksome, questions to make the IR35 determination will be answered by both you (the hiring company) and the freelancer - all in the Worksome platform. Worksome does not answer these questions for either party.
Once started, projects ‘Outside IR35’ will be billed as usual, and ‘Inside IR35’ incurs deductions of income tax and NICs to the freelancer’s paycheque to comply with UK law. Worksome handles all of the above, including payments to freelancers and recruiters.
‘Inside’ or ‘Outside’... Does it really matter?
It will determine how much the freelancer will be paid after deductions. Projects determined as ‘Inside’ will see freelancers incur personal income tax deductions at source. ‘Outside’ and your company can pay the freelancer a gross amount (without tax deductions) as usual. Either way, Worksome manages the payments for your company, your freelancers and your recruiters, and it’s automatically added to contracts and all billing in-platform.
Does Worksome insure the 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?
More paperwork, more stress and higher risk. HMRC has a Check Employment Status for Tax (CEST) tool, containing lots of questions to be manually answered for each freelance project. Sadly, in around 20% of cases CEST is unable to determine whether an assignment is Inside or Outside of IR35. Luckily, Worksome uses the data produced by both employers and freelancers in the hiring process to answer the majority of these without you having to lift a finger. Technology, eh.
So what do I need to do?
To guarantee that your business is hiring freelancers in line with UK law, you need to run your freelancer contracts through an IR35 determination.
Worksome will help manage your freelancers and recruitment suppliers, automate HMRC checks, contracts, timesheets, billing and payments. No risk, no stress, and way less paperwork for everyone involved.
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 firstname.lastname@example.org.