AccountingCareers & Employment

IR35: A Basic Guide For Freelancers

Filling in with a pen HMRC self employment form

IR35 is the tax legislation that helps the government determine whether a freelancer is operating legitimately, or whether they are a disguised employee.

The aim is to make sure that tax payments are fair and balanced – so freelancers pay the same amount that they would pay off if were to be brought on board as a salaried member of staff.

In April, the government changed the way that they assess IR35, and it’s important that freelancers understand the current guidelines. Knowing whether your work falls within the IR35 legislation or outside of it will help you to plan your tax payments and avoid any issues with HMRC.

Understanding the terminology

If a freelancer is considered to be acting as an employee, then they are described as being ‘inside’ the IR35 legislation. This means that the employer will need to deduct pay as you earn (PAYE) tax and national insurance contributions before making payment. Freelancers who fall ‘outside’ IR35 aren’t affected by the legislation, and therefore the employer would not need to deduct tax and can pay a gross amount instead.

What criteria will HMRC be assessing?

HMRC have a few different criteria that are used to determine whether or not IR35 should apply. Here are some of the key points:

  • Direction and control. This refers to the amount of autonomy that a freelancer has over their work. If the company sets specific tasks and milestones then they may be considered to have too much control, meaning that the week relationship falls inside IR35.
  • Substitution. The right to substitution of one of the key principles of IR35. In practical terms, it means that a freelancer should be able to supply a substitute if they’re unable to perform the work for whatever reason. This is in contrast to an employee, who will provide their personal service.
  • Mutuality. So called ‘mutuality of obligation’ is seen as a sign that a contract may fall inside IR35. Essentially, it occurs when there is an expectation of an ongoing working relationship – an expectation that the freelancer will be available for work when requested, and an expectation on the freelancer’s side that the business will continue to supply jobs.

They will also look at factors such as who supplies the equipment used to work, whether the freelancer carries any financial risk, and whether the freelancer is providing an exclusive service or working for multiple clients at the same time.

Who’s responsible for assessing IR35?

This is the most important thing to have changed in the updated guidance. Whereas previously it was up to the freelancer to determine whether or not they fell within IR35, that responsibility will now fall to the business – as long as they’re a medium or large sized private business or a public sector authority. For smaller businesses it will still be up to the freelancer to decide.

What to do next

For many people it will be immediately obvious whether you fall inside or outside IR35. However for those who are unsure, it may be worth speaking to an accountant. Generally speaking, freelancers should consider working with an accountant anyway to avoid any nasty surprises come tax time!

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