What to know about IR35 for freelancers?
What is IR35?
In 1999, HMRC issued a tax law called IR35 to stop independent contractors from receiving unfair benefits of taxation when they give services through a limited company or by being self-employed. It is trying to close a loophole in tax legislation that some people were taking advantage of. Why? Because freelancers operating through a private establishment usually pay lower income tax and do not need to pay national insurance. In April 2020 it sees the expansion of IR35 from the public sector to all businesses. This is seen as a tax on consultants, self-employed, Giggers, Construction workers, temporary employees and contract workers.
Who falls under IR35?
Because of this legislation, companies and/or organisations operating in the private sector become responsible for determining the IR35 status of the freelancers they work with. There are exemptions to the rule when the HMRC deems a freelancer is engaged to a small company, the new rules will not apply. Meaning, if freelancers serve a small company, they are eligible to continue determining their own IR35 status as it relates to these small businesses.
There are two main types of workers who may be affected by IR35:
- Independent contractors or self-employed individuals that provide longer-term services or work on bigger projects for their clients that HMRC considers almost like a temporary employee.
- Freelancers or self-employed people providing short-term services or working on smaller projects, often for many clients at once.
The thing about IR35 is it doesn’t matter what type of job role, skill set, expertise and profession – whether you’re an independent contractor or freelancer, the changes to IR35 can affect you.
In conclusion, to fall outside the IR35 legislation, it must be clear and proven that you provided a service as a business, rather than an employee. IR35 is already in effect in the public system and it is not all bad though, as this could also help your contractual relationship with your client.
