Does IR35 apply to freelancers?
As a freelancer, you’ve probably heard about the IR35 reforms. Some freelancer platforms have been spotted using the new legislation as an excuse for pushing freelancers towards their partners’ umbrella companies, for instance, while others will have had chats with clients and recruiters about whether or not they need a Status Determination Statement (SDS).
But what is IR35 exactly? And does it apply to freelancers as well as contractors?
What is IR35?
The new IR35 legislation came into effect for the private sector on 6th April this year (they’ve been in place for a while now in the public sector). The rules have been around for more than 20 years, but the new legislation changes how they are applied.
Your IR35 status is whether you are considered genuinely self-employed for an engagement or if you should be considered a ‘disguised employee’. The legislation is designed to prevent individuals and organisations taking advantage of the lower tax rates for contractors working through their limited companies, while effectively acting as an employee. It takes into account your contract and working practices, including status tests such as:
- Whether or not you offer a personal service, or do you have the unfettered right to send a substitute;
- How much control you client has over your work; . Something called Mutuality of Obligation (MOO) which boils down to whether the client is obliged to continue offering you work and whether you are obliged to agree to it;
- Other more minor tests that look at aspects such as whether you take on financial risk, provide your own equipment, hold business insurance and whether you’re in business on your own account, or part and parcel of the client’s organisation.
Your IR35 status affects how you pay tax and National Insurance contributions for any given engagement. If you are ‘outside’ IR35 then you are responsible for paying your taxes and NICs through Self-Assessment as any self-employed person is. However, if you are ‘inside’ IR35 then you must pay tax and National Insurance through PAYE at the same rate as an employee.
Previously, it was up to the contractor to decide if their engagement was inside or outside IR35 and they would also hold all of the tax liability, but the new legislation changes this – at least for medium and large clients. If your client is deemed a medium or large business, then the responsibility for determining your IR35 status now lies with them, while the tax liability lies with your fee payer (this could be your client or it could be someone else such as your recruiter). Things remain unchanged for small clients.
Of course, this is only a brief overview and you can find out more details on the ins, outs and status tests over on the IR35 section of the Kingsbridge Knowledge Hub.
Does IR35 apply to freelancers?
The short answer is: no, it doesn’t apply to freelancers.
Generally speaking, freelancers operate as sole traders rather than through limited companies, and the legislation only applies to individuals operating through their own limited companies, not sole traders.
The long answer, therefore, is: IR35 doesn’t apply to freelancers as long as they’re not operating through their own limited companies. Those that are should read on…
But I do operate as a freelancer through my limited company
If you are a freelancer operating via your limited company, then IR35 does apply to you. This means that for each engagement your client will have to issue you with a Status Determination Statement (SDS) declaring you inside or outside IR35. If you are outside then there are no major changes for you – simply pay your tax and NICs through Self-Assessment as you normally would.
If you are found inside IR35 for an engagement based on your contract and working practices, then your fee payer (this could be your end client or your recruiter – whoever pays you) will need to deduct your tax and NICS at source through PAYE and you will be taxed at the same rate as an employee. However, it’s important to note that, based on the main status tests, general freelancer working practices would make it unlikely for you to be found insider IR35.
Is there any way for me to check my IR35 status?
While it’s unlikely a freelancer would be found inside IR35, there’s no harm in checking – especially if you work regularly or long-term with one particular client. The Kingsbridge IR35 Status Tool allows you to easily check your IR35 status for any given engagement.
The clever tool, designed by Kingsbridge’s Head of Tax, Andy Vessey – a man with more than two decades of experience working with the legislation – asks between 29 and 34 questions about your contract and working practices to gain a full view of your engagement. If your status is clear cut then it issues you with an inside or outside determination instantly, alongside a comprehensive report detailing the strengths and weaknesses of your case. If, however, your result is borderline, it gets passed over to one of our in-house IR35 specialists to review and they will get back to you with your result. It gives you peace of mind, as well as confidence in your status. All for just £50 plus VAT. If you’re in any doubt about your IR35 status, check it out today.