What freelancers need to know about IR35 

From 6 April 2021, there will be changes to how the IR35 rules are applied. 

Off-payroll working, also known as IR35, is a complex piece of tax legislation that affects both businesses and freelancers.  

Here at NABS, we know how managing finances can impact on people’s wellbeing. If you’re a freelancer who’s feeling daunted by the IR35 update, we understand – and we’re here to help. 

In this blog, we’ll go through what IR35 is, we’ll highlight the key changes that you need to be aware of, and we’ll share ways that you can support yourself to feel more confident when it comes to navigating the regulations. 

What is IR35? 

IR35 was introduced by HMRC to assess whether a freelancer providing their services to an organisation through a limited company is considered a genuine freelancer or is operating as an employee.  

This is so HMRC can make sure the right levels of tax are being paid by both the company and the freelancer.  

According to IR35, if the freelancer is operating as an employee, both the freelancer and the company should be subject to the higher tax rates i.e. on the same basis as employees on the company payroll.  

For the avoidance of doubt: 

• If a freelancer falls within IR35, the company will deduct PAYE and NIC from the freelancer’s fees before payment is made. 
• If a freelancer falls outside of IR35, the company will pay the freelancer a gross amount, without deducting PAYE and NIC. 

There are several tests that are used to determine whether a freelancer falls within or outside of IR35. These include: 

1. Control. Who controls whom?  If the company broadly controls the freelancer, this is indicative of being within IR35. 
2. Mutuality of obligations. To be genuinely freelance, you must be able to demonstrate that you can, if you wish, turn work down. If there is an obligation for the company to regularly offer the freelancer work and the freelancer has to accept it, there could be a mutuality of obligations, meaning that the freelancer could be within IR35. 
3. Substitute. Ideally, the freelancer would have a substitute, being another person of their skill, calibre and experience that they could send to do the work in their place, were they ill or indisposed. If they don’t, this could indicate being within IR35. 
4. Insurance. The freelancer must ideally have their own public liability insurance, and, where merited by the nature of the work, their own professional indemnity insurance. Failure to do so could indicate being within IR35. 

The above list is by no means exhaustive and HMRC will ask other questions. 

What are the changes coming into place? 

Previously, the onus was on the freelancer to determine whether the IR35 rules applied.  As of 6 April 2021, that responsibility is changing as follows: 

• Private sector companies considered to be medium or large in size, as well as public sector authorities, will be responsible for assessing whether the IR35 rules apply to a freelancer working at their organisation.  
• At a small private sector company, the responsibility for assessing whether the IR35 rules apply will still lie with the freelancer. 

For a private sector company to be considered medium or large in size, they must meet at least two out of the following three conditions:  

• Its annual turnover (sales) must be more than £10.2 million. 
• Its balance sheet total must exceed £5.1 million. 
• It must employ more than 50 Employees. 

Implications of IR35 

There are possible financial implications if HMRC finds the status of the freelancer is wrongly determined.  

You must futureproof yourself against any potential investigations by HMRC by equipping yourself with right information and getting agreements in writing at the start of each new contract. 

Supporting your wellbeing 

There are several things you can do to prepare for the changes and support your wellbeing as these come into place:  

• Read up on the changes and what they could mean for you. There is a lot of information out there which can be overwhelming. Good places to start include Gov.uk and Crunch.  
• Take specialist advice from an accountant. Ask the NABS Advice Line for their accountant contacts; ask your network for a recommendation or try online accountancy firms including the accountancy partnership and Crunch. 
• Connect with your network. Talk with other freelancers, colleagues, friends or family about any worries or concerns. Leapers, the organisation supporting the mental health of freelancers and the self-employed, provides direct access to this community and has tips for managing anxiety that might be affecting you as a result of the IR35 changes. 
• Remember that this is complex stuff. It’s okay if you don’t understand it all or are unsure how to approach the changes. Acknowledge that this is not your specialism and ask for help. Reach out for support as you need it, be that financial advice through a specialist or practical and emotional support via your network or the NABS Advice Line. 

If you’re not sure where to start, we’d encourage you to reach out to the NABS Advice Line for an impartial, friendly chat with one of our senior support advisors, who will help you to consider your options, provide emotional and practical support, as well as signpost you to any relevant services such as career coaching and the NABS Knowledge Hub. 

Disclaimer: The information contained above is for general information purposes only. Always consult your financial advisor or accountant for advice relating to your situation, as each case is individual. NABS cannot be held responsible for any dispute or financial loss that may arise following the use of this page or the links contained therein.