From April 2017, in the public sector only, IR35 status will be determined by the client not the contractor. If the public sector client decides that IR35 should apply to the engagement, payment to the contractor's company will be taxed at source - as if they were an employee. For more information about this change, go to the Public Sector tab in our Policy pages
- IR35 is a tax law which allows HMRC to treat fees paid to a limited company as if they were an individual’s salary. It was intended to stop “disguised employment” where employers pay their employees as if they were limited companies, to save tax. The law unfairly affects small companies legitimately supplying services to businesses – freelancers.
- There is no way to know for certain whether or not IR35 applies. It has been badly implemented – HMRC has wrongly targeted legitimate freelancers in hundreds of failed cases and lengthy investigations.
- IPSE believes HMRC’s implementation of the law has been poor and we are committed to working with the Government to create a tax environment that provides clarity, consistency and certainty for the UK’s freelancers.
What is IR35?
- Also known as the “intermediaries legislation”, IR35 is intended to stop “disguised employment”. This is where employers engage their employees through limited companies, thus avoiding the need to pay Employer’s National Insurance Contributions, Sick Pay, and Holiday Pay, with the disguised employee also able to benefit from a reduced tax bill.
- IR35 taxes the fees paid to limited companies in a manner similar to salary where HMRC believes disguised employment is occurring.
- For IR35 to apply, HMRC have to determine whether the relationship between a freelancer and their client is in fact an employer- employee relationship, by referring to a number of complex and subjective tests established in case law.
- These tests are unclear, making it impossible for freelancers to determine with any certainty whether they are ‘caught’ by IR35.
- Freelancers working through limited companies are often engaged by businesses because of the flexibility and skills they provide. The legislation creates risk and uncertainty for such individuals and it ignores the fact they are genuine businesses, not disguised employees.
- Low-paid workers who are abused should be protected and illegal tax evasion should be punished, but IR35 fails to meet either of these aims effectively and has created an environment where a lack of clarity has stifled the flexible labour market.
Why is it a problem for freelancers?
- Freelancers have been wrongly accused of being disguised employees on numerous occasions. The resulting IR35 investigation disrupts their business and can be expensive.
- Freelancers often use their own limited companies to supply their services to other businesses. There are sound commercial reasons for freelancers to use the limited company model, and this decision is not motivated by tax considerations. Agencies will typically insist on the use of a limited company for legal reasons. Limited companies can also be useful for liability purposes, and they allow freelancers the flexibility to retain profits in their business.
- IR35 ignores this commercial reality and instead creates a great degree of risk. Whilst freelancers clearly are not “employees” of their client, and are engaged in a business to business way, IR35 puts them at risk of long, intrusive, and financially damaging investigations.
- To limit this risk, many freelancers spend large amounts of their time and money on protecting themselves from IR35; taking out insurance policies, contract reviews, and legal fees, when they would rather be delivering flexible skills to the economy.
- IR35 reduces flexibility in the labour market. A report by Oxford Economics in 2009 estimated its cost to the economy at £1.2bn.
- Historically, it was not uncommon for IR35 investigations to go on for many years before even reaching a tribunal.
- In one typical case, Mark Fitzpatrick, a freelance designer from Bristol was pursued by HMRC for seven years before he was cleared of all wrongdoing. In another, five years passed before Elaine Richardson of ECR Consulting was determined to be outside IR35. Phil Winfield of Primary Path had to wait almost eight years for his IR35 case to be resolved, creating a long period of uncertainty.
- In each of these cases, the emotional and financial toll of these investigations was significant, and without appropriate insurances would have likely cost each individual tens of thousands of pounds to resolve.
- Thanks to IPSE campaigning, HMRC now commit to closing enquiries much more quickly, and have established dedicated specialist investigation teams to deal with IR35, in an effort to avoid long, drawn out cases.
Making the case for change
- IPSE was formed in response to the issue of IR35 when a group of freelancers came together to campaign against it. It has grown from a single issue group to a trade association of some 21,000 members.
- IPSE has supported its members through backing cases in courts and tribunals, to bring clarity to IR35. It also provides its members with an extensive suite of tools and advice to help understand whether or not it applies to them.
- To make the best possible case for change, IPSE has engaged experts, including leading academics, legal professionals, and survey specialists ComRes in the fight against IR35.
- Freedom of Information Act requests, and Early Day Motions in Parliament have also been used to raise awareness of the issue.
- IPSE works with HMRC and the IR35 forum to ensure that HMRC's "new approach" to IR35 is enforced properly. We would like to see a radical change to the scoring of the recently introduced system of "business tests". In their current state the tests are unhelpful and, in some contexts, even damaging.
- IPSE worked closely with the Conservative Party and the Liberal Democrats in opposition prior to the 2010 General Election, putting IR35 back on the agenda.
- Sitting on the Consultative Committee of the Office of Tax Simplification, an independent body of experts established by the Government, a clear case was made for change. The Government committed to improving the administration of IR35, stopping short of outright abolition, and established an ‘IR35 Forum’ to improve the way IR35 works and make it clearer for freelancers.
- IPSE is a key part of the IR35 Forum, engaging directly with decision makers, helping to shape a fairer, simpler tax environment for the UK’s freelancers.
- HMRC have acknowledged that past implementation of IR35 has been poor, and IPSE is working constructively with HMRC to make sure mistakes are not repeated.
- Whilst no major political party currently supports abolition of IR35, IPSE is committed to securing a regime which provides clarity, certainty, and consistency for freelancers, and ultimately to secure abolition in the longer term.
- IPSE will always support a tax regime that supports the flexible labour market, and does not hinder freelancers from playing a valuable part in the UK’s economy.