Introduction

Introduction

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:

Personal service

Does the worker have to perform the tasks personally, or can they send someone else to do it in their place – a substitute? If substitution is allowed, IR35 does not apply. If substitution is not allowed, it does not necessarily mean IR35 applies, but it’s not helpful.

Mutuality of Obligation

This is the most difficult and nebulous of all the ‘tests’. The best way to think of it is: ‘is there an ongoing obligation on the client to provide work, and a corresponding obligation on the part of the worker to do it?’ If the contractor only performs what was agreed when the contract was drawn up, then there’s no mutuality and therefore no IR35. However, HMRC take a different, much stricter interpretation than this so be careful here. In fact, HMRC are currently fighting (and losing) a case in the courts which centres on mutuality so this is very much a disputed definition at present. I told you it was complicated!

Control

Sometimes referred to a ‘supervision, direction and control’ this is about the degree of autonomy enjoyed by the worker. If they control how, where and when work is done, IR35 does not apply. If the client has a significant degree of control over the worker, as they would over an employee, then IR35 is more likely to apply.

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.

IR35 Guide

Read our guide 'IR35 in the private sector'

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 FAQs

Frequently asked questions about IR35

Paul Mason from Markel Tax answers common questions from IPSE members.

IR35 FAQs

 

Q and A webinar

IR35 Q and A webinar

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.

To view this webinar, login or become an IPSE member.

 

Post-IR35

What are my options post-IR35?

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.

Additional support 

Additional support 

 

Webinars

Check our webinar hub regularly as we aim to answer some of your burning questions and discuss the latest developments of IR35 and all areas of self-employment.

IR35 webinar

Contract Review service

Get your contractual documents and status questions reviewed for IR35, easily and inexpensively online.

Contract Review Service

 

 


 

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