Two years ago I went off the beaten track and wrote a blog on what is a vexed topic for many freelancers – IR35 – sometimes known as the ‘off-payroll working rules’.
These HMRC rules were introduced in 2000. They’re designed to ensure that contractors are not disguising what in reality amounts to an ’employment’ relationship with their client, to benefit from the tax advantages of operating through a limited company.
Some of my colleagues found the blog useful, thankfully. But as much as anything it was an internal thinkpiece. A way of proving to myself (or even HMRC if they ever came knocking) that I know about the criteria and can argue credibly that I am legitimately outside IR35.
This blog updates that thinking in the light of things that have happened internally in my business, and in the IR35 world itself, since I wrote the original piece.
[As before, please note: this blog does not represent advice. This is a contentious topic. If in any doubt, consult your accountant or a professional HR adviser.]
Quick reminder on IR35
Using private limited companies (including, increasingly, umbrella companies) as the hiring vehicle for contractors has benefits all round. Employers don’t have to bother with their side of National Insurance contributions, or the pesky issue of employee benefits. Contractors meanwhile can benefit from lower (e.g. corporation and dividend) tax rates.
The issue is where the contractor is essentially, in reality, working as an employee. For example being ‘managed’ by the client, taking day-to-day directions from them, and other things you typically find in an employer-employee relationship. In this case, operating through a limited company, with all its associated tax and NI efficiencies, is in effect disguising the truth of the working relationship.
So the IR35 guidelines test whether contractors doing work for clients are in effect employees. If you’re deemed ‘outside’ IR35 you can continue operating through your company. Including paying tax through it at the lower rates that apply to companies. If you’re deemed ‘in’ IR35, on the other hand, you are considered an employee and face the same income tax and NI requirements that any employee would.
Last time’s conclusion
Two years ago I had only been in freelance business just over a year, and without exception my client relationships were clear cut and straightforward. I concluded, on the strength of all the evidence, that my business was palpably outside IR35. This was based on both the generic criteria (the nature of my business generally) and the three specific criteria (which get applied assignment by assignment).
Just to be sure, though, I committed to ‘mark’ every single client assignment I had against the specific criteria:
- Direction and control (DC)
- Mutuality of obligation (MO)
- Right of substitution (RS)
Results vs the criteria
It turned out, for all my clients up to that point – and most since – that fulfilling the DC condition was straightforward. I am my own boss and as long as I deliver the required outcome for the client, how, where and when I achieve it is largely up to me and is not imposed by the client.
Similarly MO. If I don’t do the work I don’t get paid. And I don’t have to do any work that does get offered. I often turn work down. I sometimes walk away from clients with no explanation or liability. There is no obligation on either side.
RS was also straightforward but in the wrong direction. In Prism-Clarity there is only me. I cannot send along a substitute with similar skills or experience to do the job instead of me. In a one-person band they aren’t available.
Fortunately – so all the advice goes – you don’t have to fulfil all three specific criteria in all cases. Ideally you would, but even one is better than none. Two is pretty good, especially when taken alongside evidence from applying the general criteria.
I have multiple clients, many in play at the same time. The client relationships are on my terms. I’m always on the lookout for new ones and old ones are falling by the wayside each year. It’s a merry-go-round, just like other businesses. Employment-type relationships they are not.
So what’s changed?
In terms of my business one important thing has changed. I’ve taken on a true contractor role with a large bank. Or rather, contractually, Prism-Clarity has signed an agreement with a service company providing resources to a large bank.
On the negative side, in IR35 terms, are the following factors:
- I sometimes work at a corporate office (the rest, around half the time, at home).
- I use a company laptop. Given the nature of the banking business and the need for high security and tight controls this is pretty much inevitable.
- If asked to participate in training that is deemed mandatory for actual employees, I do it. I think of it as CPD – and helping my sponsor avoid administrative stress – but I do it.
- When my sponsor occasionally asks for a time-specific delivery, I do it, no questions asked.
On the positive side:
- I can pretty much choose which office I go to. Or, if requested to attend a given office, I can accept or decline at my own convenience rather than being directed.
- I insisted on the contractor relationship being only two days a week. This leaves me free to continue working with other clients. This was (probably, judging from things that have been said) not ideal for the client. They wanted me five days a week. But I could not be directed to accept those terms.
- Sometimes I question or deflect work assignments that I consider not appropriate for my skills and experience.
- Working alongside me is a team of similarly skilled and experienced contractors, enabling me to fulfil the substitutability (RS) criterion. Admittedly they are employed by their own companies not my company. But it is as close as you can get to a true substitutability arrangement.
What’s changed in the outside world?
On the face of it, not much. But changes are coming in 2020 which could have big administrative implications for private sector companies hiring contractors; and could de facto lead to many more contractors and freelancers finding themselves defaulted to ‘in IR35’ rather than defaulted to ‘out’.
David Prosser in Money Week explains the situation well. In essence, back in 2017 the government decided to make all public sector companies responsible for the decision on whether a particular contractor was ‘in IR35’ or ‘out’. The change that’s coming is that that responsibility will be extended to private sector companies as well:
From April 2020, private-sector organisations will also be required to determine the tax status of every freelancer and contractor they hire, and they too will have to deduct income tax and national insurance before paying them if they decide IR35 doesn’t apply. Employers say this imposes a major administrative burden, since they will have to consider the tax status of every third party they hire. A lack of definitive guidance on who exactly is and isn’t covered by IR35 makes things worse.David Prosser, Money Week, 24th July 2019
The estimated cost is huge. Prosser goes on to quote the HMRC estimate that that 170,000 contractors will be affected by the change, with a total additional tax bill of over £3 bn over the four years from 2020.
Is there any good news?
If there is good news it is that the requirements themselves don’t seem to be changing. What’s changing is the channel or mechanism for assessing eligibility. This is essentially being outsourced from HMRC to the hiring companies alongside a change in the burden of proof. ‘If you can’t prove you’re out, you’re in’. As opposed to ‘if you’re not obviously in, you’re out’.
And you’re more likely – very likely in fact – to have to point to the evidence, because your sponsor is going to require it. At the moment you’re fairly unlikely to have to point to it because HMRC’s resources are limited and the balance of probability is that they won’t come knocking.
What’s good about this?
Well, that’s a fair point. My argument is that the criteria are relatively straightforward to assess. And if you develop the habit and practice of applying them to each contractor or freelance assignment you take on, you will soon build up a body of indicative evidence. Of course you need more than a high level indicative Yes or No against each criterion. But it’s a start. If you can then start building up specific evidence to support your arguments in each case, you will have something in your armoury when having the discussion with your sponsor.
It could go one of three ways.
- Some hiring clients and sponsors will be so keen to avoid ANY administrative burden that they won’t be prepared to even have the discussion, and will just impose a blanket ‘in’ across the board, as a matter of policy.
- OR you may find that there is simply no way you can avoid being interpreted as an employee given your particular contracting circumstances; in which case you will be (perhaps quite appropriately) deemed ‘in’ and have to accept it.
- OR you may decide you just can’t face the fight and take it on the chin regardless of having a good case to argue; pay the higher NI and tax bill and perhaps try to compensate by seeking a higher day-rate.
This freelancer will be watching carefully to see how it goes next April. In the meantime I’m hanging on to the precious notion that I am ‘out’ until that line becomes impossible to defend one way or the other. Which I don’t expect!