IR35 3 Years On

In recent years, freelance work has been subject to significant regulatory change, raising concerns for both the freelancers themselves, and hiring businesses.
UK Tax
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Off payroll working rules for the private sector (IR35) – recent data suggests it is excluding many from the labour market.

In recent years, freelance work has been subject to significant regulatory change, raising concerns for both the freelancers themselves, and hiring businesses.

The off payroll working rules (commonly referred to as IR35) potentially apply to individuals who provide services to clients through an intermediary; generally, a wholly owned “personal service” company. However, if it is determined that the commercial reality is individuals are effectively “employees in disguise” but benefiting from the tax advantages of being contractually self-employed, then the rules will apply to set aside this advantage and tax them as if they were employees.

Since April 2021, the responsibility for determining the tax status of freelancers in the private sector moved from the individual's intermediary (so generally, the personal service company) to the hirer i.e., the end client. This shift was intended to increase compliance – large hirers are keen to avoid reputational damage (and financial penalties) and it is easier for HMRC to pursue a handful of large organisations compared to potentially several thousand contractors.

Recent data looks at the impact of 2021 IR35 changes 

A survey recently conducted by the Association of Independent Professionals and the Self-Employed (IPSE) highlights the impact of these changes. Key findings from the survey included:

  • Among the 1,300 contractors surveyed, half of those who reported as being out of work blamed changes to IR35 as the reason. 
  • Over half of those surveyed had rejected an assignment in the past year due to it being classified as “inside IR35” by the hirer.
  • Almost 25% said they were considering opportunities overseas to escape the rules.

Additionally, separate data from the public accounts committee indicates that up to 200,000 contractors have been moved onto payroll since inception of the rules.

At Price Bailey, we regularly help clients (freelancers and hirers alike) navigate what has evolved to become a complex set of rules, and our observations mirror the trends above:

  • Large hirers frequently dictate an arrangement will be ‘inside IR35' without undertaking any kind of bespoke assessment. While this is contrary to HMRC's guidance, and the contractor does have the right of appeal, respective bargaining power means that, frequently, the freelancer is forced to accept those terms. In those situations, we also always advise the contract is reviewed carefully to ensure the contractor will be receiving the rate they are expecting on an after-tax basis.
  • We have an increasing number of conversations with individuals seeking work from overseas engagers. While doing this potentially avoids the IR35 rules, it is not a given and needs to be considered carefully. Additionally, this can sometimes create other UK tax issues for the hirer itself (for example, creating a UK permanent establishment).
  • New rules effective from April 2024 will allow hirers to offset a liability under the off payroll working rules with tax already suffered by the freelancer in instances where arrangements are initially miscategorised as being ‘outside IR35'. While this is welcome, it seems unlikely it will significantly change the behaviour of hirers, particularly large ones, who have to date been very risk averse.

In summary, while reform in the rules was needed to increase compliance with IR35, the application of the rules by large businesses, appears to have had the unfortunate effect of forcing many out of the UK labour market.

IR35 – FAQs

Do I need to provide my subcontractor with an SDS (status determination statement)?

Yes! An SDS is a statement provided by the client that identifies the worker's status following an IR35 assessment, including the reasons for reaching this conclusion. This should be provided to the worker. If the client is not the fee payer, it should also be provided to the next party in the fee-paying chain (typically, an agency) to ensure they withhold payroll taxes accordingly and the client does not remain liable.

Do the rules apply if my personal service company (PSC) provides services to an overseas client?

If your overseas client has no “UK connection” for a tax year it remains for the PSC to determine whether the arrangement falls within IR35 and apply payroll taxes accordingly. (A client has a UK connection for a tax year if (and only if) immediately before the beginning of that tax year the client: (i) is resident in the UK; or (ii) has a permanent establishment in the UK)

What is the interaction of IR35 with the Construction Industry Scheme (CIS)?

An arrangement cannot be subject to both IR35 and CIS; IR35 takes priority.

How do I calculate the amount of payroll deduction?

If a contractor is determined to fall within the IR35 rules:

  • workers should be added to payroll as any other starter would be. They should be issued a starter checklist so they can provide the deemed employer with the information it needs to run payroll.
  • the declaration the worker chooses on the starter checklist will determine their tax code. Usually, this will be declaration C as the worker will already have primary employment with their intermediary. This would put them on tax code BR. 0T week 1 / month 1 would apply if the worker does not return the starter checklist. HMRC can then issue another tax code if it is required.

I'm a worker –if the contractual arrangement with my client is deemed to fall within IR35, will I be taxed twice?

No. There are provisions within the legislation that allow for relief at the corporate level (i.e., the client's net income receipt in the PSC is non-taxable) and for offset of tax already suffered against extraction of profits from the PSC.

What is a small company in the eyes of IR35?

For the purposes of the new regime, a “small” company is defined using the Companies Act 2006, and is one which meets at least two of the following three criteria:

  • turnover of not more than £10.2 million;
  • aggregate assets on the balance sheet of not more than £5.1 million, or
  • not more than 50 employees.

This may not always be easy to access, particularly in the case of private businesses. In addition, it's not always this straightforward – so here's a quick guide to a few of the potential complexities:

  • The financial criteria for a small business is based on the previous full year's results; If your client is having a successful year or expanding rapidly, they may be moving into the medium-sized business bracket, and that could have significant implications for your contract and employment status next year.
  • If your client is not a corporate entity, only the turnover test needs be considered.
  • Make sure you understand your client's business structure; If your PSC is engaging with a company that is part of a group, the financial criteria you need to test may be based on consolidated financial statements.
  • Public companies are always regarded as medium or large for the purposes of the regime, regardless of their financial results
  • If your client is an overseas entity, unfortunately this doesn't mean that your arrangement is exempt from IR35. The rules will still need to be considered, even though in reality, the client entity is likely to have little or no awareness of rules or their potential obligations under them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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