For 20 years, IPSE has been not only campaigning against IR35, but also advising contractors and the self-employed on how to navigate it.
IR35 is tax legislation which impacts self-employed people who work via an intermediary – typically their own limited company. The rules seek to prevent any tax advantage being gained by individuals who might be ‘disguising employment’: in other words using their limited company to present themselves as a business supplying services, rather than what they really are – in the eyes of HMRC at least – an employee.
The rules that govern when IR35 applies are notoriously complex, which is one of the reasons why the legislation has been so controversial. In fact, IPSE was originally set up specifically to oppose the IR35 legislation. For now, the rules are here to stay, so it’s important that freelancers who operate via an intermediary understand them.
If you don’t operate through a limited company or a partnership you are probably a sole trader and IR35 does not affect you.
If IR35 applies to an engagement, the contractor becomes what HMRC call a ‘deemed employee’, which means they will have to pay employment taxes on income from that engagement. If IR35 doesn’t apply, tax will still need to be paid but they are different taxes at different rates, which generally means HMRC receive less revenue overall. This creates the central tension of IR35: HMRC will seek to argue it applies while contractors will argue it doesn’t.
How do we know if IR35 applies to an engagement?
The rules are set out in case law – which means the outcome of one case can affect future interpretation of the law but there is one ‘seminal’ case (referred to as Ready Mixed Concrete) which outlines the core IR35 considerations:
There are further tests to consider, which centre around whether the contractor is ‘in business on their own account’, but these are considered secondary to the test above.
The explanation given above is a crude summary: the case law gets more complex with every passing case and there is an endless amount to read up on if you are so inclined.
Changes to IR35
From this month, end-clients have to wrestle with the difficulties of making IR35 determinations. Previously, it had been the contractor’s obligation. This has unfortunately resulted in many more engagements being deemed ‘inside IR35’.
Small end-clients are exempt but for everyone else it is important to speak to your client about the IR35 status of your engagement and make sure they are doing a proper assessment. The difference in your take-home pay can be significant so you want to make sure the client is getting it right.
For a more in-depth look at how the IR35 rules work, take a look at IPSE’s Guide to IR35.
IPSE’s campaigning has secured delays and important concessions, but government is determined to enforce the IR35 changes. Find out what exactly the changes are and how they are likely to affect you in this guide.
Read our advice
IR35 Q and A webinar
One of the key problems with IR35 is that the legislation is notoriously complex. In this guide, Paul Mason, Head of Tax at our partner Markel, unpicks this complexity and answers some of the most common questions about the rules.
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Since the implementation of the new IR35 (Off-Payroll) reforms, many contractors are feeling disheartened about their future in self-employment - not least because many are having to work through umbrella companies for the first time. This doesn’t have to be disheartening, however: as James Harris, Head of Compliance at JSA Group explores, there are still many options for contractors in the post-IR35 world.
The recent IR35 (off-payroll) reforms have had a big impact on the self-employed community. Many freelancers who were previously working ‘outside’ IR35, have now been told they can no longer provide services through their limited company, raising questions about how they can continue working compliantly whilst maintaining the flexibility they have previously enjoyed.
There are various options available to you (as a contractor) depending on how you see your career progressing. For example, if you believe most of your contracts will be ‘inside’ IR35 now, then becoming an employee of an umbrella company might be best for you. However, if you think you may be switching between ‘inside’ and ‘outside’ contracts, or your ‘inside’ contract is very short-term, then there are other avenues available.
Umbrella employment
Umbrella employment is one of the easiest and simplest ways to work flexibly. Often, freelancers engage umbrella companies when they want to take their first steps into contracting but don’t want to go straight into setting up a limited company, which has lots of additional costs and admin responsibilities. After all, running a limited company is not right for everybody.
The umbrella sits between the recruitment agency and the contractor in the supply chain. To contract this way, you will become an employee of the umbrella company, which will then supply your services as its employee to other companies (end clients or recruitment agencies).
As an employee of an umbrella company, you will be paid via their payroll. You will be required to complete a timesheet for each pay period, which, once signed by the end client, can be passed on to the agency. Your employer (the umbrella company) will raise an invoice for the number of hours you’ve worked and will send this to the agency, which in turn will invoice its client (the company you are ultimately providing services to).
Payment then follows the contractual chain. The end client will pay the agency, which, on receipt, deducts its margin and then pays the umbrella company for its services. The umbrella will then retain its margin and calculate any costs, including Employer’s National Insurance, the Apprenticeship Levy, holiday accrual and any pension contributions, where applicable. The umbrella then pays you your agreed salary.
Although you are no longer able to structure your payments with the same level of tax efficiency as you could through your PSC, there are some benefits to umbrella employment. For example, you should generally have statutory employment rights such as sick pay and parental leave. The exact benefits will vary depending on the umbrella you choose, though at JSA they include a wide range of insurance cover (as standard), the option to continue paying into your SIPP/private pension, our exclusive rewards programme, which offers discounts on hundreds of high-street brands, holiday and leisure savings, and access to a mental health support hub in addition to all your statutory employment rights.
If you are going to continue working on ‘inside’ contracts for a while, umbrellas are a great option, as you can enjoy the freedom and flexibility of contracting while having access to a wide range of employment protections and benefits.
Continuing to work through your PSC
Contrary to popular belief, just because you’re ‘inside’ IR35, you don’t have to close your PSC. There are certain times when working through your limited company (even though you’re ‘inside’ IR35) can be beneficial. For example, if you’re working on more than one contract at once (some ‘inside’ and some ‘outside’ IR35) or you’re working a very short-term role, you may choose to put all payments through your PSC, no matter their IR35 status. This will allow you to manage your income in one place, meaning you can retain control over salaries, invoice dates, etc.
If you choose to work in this way, your fee payer (typically your agency, though this may occasionally be your end client) will need to pay your company through their payroll. They will be required to deduct Income Tax, Employees’ National Insurance, Employers’ National Insurance, and the Apprenticeship Levy, before paying you a net salary. Once you receive payment from the fee payer, this can be paid from your company to yourself. You will not be required to make any further deductions to this amount as it has already been taxed. You can continue to pay yourself dividends (where you have available profit from any ‘outside’ roles) as you usually would, though it is generally recommended not to process separate salary payments from your PSC.
Although this method allows you to keep your finances in one place, for most people, being paid for ‘inside’ contracts through an umbrella company is more beneficial because you’ll receive the same take-home pay as if you were working directly through a limited company, PLUS all of the benefits mentioned above.
Use umbrella and PSC
An option to consider if you’re not sure what the future holds is to sign up for a service that allows you to switch between PSC and umbrella working. JSA’s solution, IR35 Switch, is a perfect option if you’re caught by IR35 but believe you will be considered ‘outside’ in future roles. You will have the freedom to work both ways: ‘outside’ through your PSC and ‘inside’ through an umbrella company. It means you don’t have to make any permanent decisions now. Instead, you can wait a few months until the industry settles to review and rethink your options.
With this flexible service, when you’re caught by IR35 and working with JSA as your limited company accountant, you can ‘rest’ your PSC, pausing your operations while you work through JSA’s Umbrella. Your PSC accounts will be managed in the background, and your payroll (RTI) and VAT returns will be submitted, as appropriate. This means both you and your company remain compliant with legislation while you enjoy all the benefits of working through an umbrella company.
For as long as you’re working through Umbrella, your timesheets and payslips will be managed as they usually would for Umbrella employees. Then, as soon as you begin an ‘outside’ contract, you can switch back to working through your PSC, paying yourself a mixture of salary and dividends, as usual. This way of working is great for people who don’t want to give up the tax efficiencies of limited company contracting but may be required to take on a mixture of ‘inside’ and ‘outside’ contracts throughout their career.
We understand that IR35 has shaken the industry and caused confusion for the entire self-employed community. Please don’t hesitate to contact JSA on 01923 257257 for advice on any aspect of IR35 and an assessment of which option is best for you.
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