Whether you’re a freelance consultant yourself or a client working with one, it’s probably not escaped your attention that new tax legislation is just around the corner.
On 6 April 2020, IR35 – or off-payroll working – legislation is coming into force for the private sector. Because The Difference Collective is a 90-strong (and growing) freelance force, we’re preparing in readiness to ensure our members and clients are up to speed with the rules to help them navigate the changes.
Of course, we’re not legal or tax experts and if you need advice about your specific circumstances, do seek input from those who are. But because we are champions for ‘working differently’, we are sharing what we know for the benefit of others working flexibly in healthcare communications.
SO, WHAT IS IR35 AND WHAT DO YOU NEED TO KNOW ABOUT IT?
IR35 legislation, introduced in the public sector in 2017 and now being introduced in the private sector, aims to make sure a contractor pays broadly the same tax and National Insurance contributions as an employee if they are working in a similar way but through a personal service company (i.e. a limited company).
The new rules are designed to stop ‘disguised employment’- where an employer takes on employees on a self-employed basis rather than using an employment contract, which can save significant amounts of money for both parties.
The new rules will apply to end clients (the organisation which the contractor ultimately delivers the work for) who meet two or more of the following criteria:
- A turnover of £10.2m or greater
- A balance sheet of £5.1m or greater
- 50 or more employees
If a freelance contract is deemed to fall inside IR35, the fee payer is legally obliged to deduct tax and NI at source or engage an intermediary to do so. This may mean working with freelancers comes at an additional cost to both parties. But there may also be the opportunity to review working practices and agree contractual terms that are beneficial to both parties in a way which means the HMRC deems the freelancer is truly self-employed.
The starting point for freelancers, clients and intermediaries is to carry out an assessment using the HMRC’s ‘Check Employment Status for Tax’ (CEST) tool for each engagement; just because one contract that falls within IR35, it doesn’t mean that they all will.
WHAT DOES ALL THIS MEAN FOR FREELANCERS?
IR35 only applies to incorporated (limited) businesses. If you’re a sole trader, you may be inclined to breathe a sigh of relief at this point but do bear in mind that the rules are very similar. If you look and act like an employee, your work may still fall inside employment status so do read on!
To stay outside IR35 (if that’s your priority), it’s important to know how the legislation applies to your work – and that means understanding both what your contracts say and the actual working arrangement.
Before using the CEST tool to assess your circumstances, you might like to consider the following questions:
- Could you send a substitute to complete work in your place and pay them directly?
Understand what it is that the client is buying when they engage you. Are they engaging a certain skillset or are they engaging you (and only you will do!)? To work outside IR35, your client may need to agree the circumstances in which you could put forward – and a client would accept – a substitute to work in your place. For example, you may provide a substitute with the appropriate skills, experience or qualifications to complete an element of the project at a time when you are unable to meet a deadline.
- To what extent does the client control your work?
Consider what control, if any, your client has over when, where, and how you deliver your work. If you sell your services on a project basis and have the freedom to set the days, times, and locations of your work, it is more likely that you will fall outside IR35 than if you work on client premises for regular periods.
- Do you incur financial risk?
If you can make a profit or a loss on the work, i.e. there is a financial risk to you as contractor, this would point towards your work being outside IR35.
- Are you part and parcel of the organisation?
If you are on the organisation chart, have line management responsibility, regularly attend paid-for company social activities or receive other benefits, it becomes harder to argue that you are not part and parcel of the client’s organisation and are outside IR35.
- What do you look like to the outside world?
Do you have your own brand, marketing materials, website/portfolio etc? Do you look like an independent contractor? Are you actively marketing yourself to a range of clients, e.g. through an organisation such as The Difference Collective? These activities won’t guarantee your freelance status, but they do help to demonstrate it.
If your work falls inside IR35, you may find yourself with a higher tax bill but without all the benefits and entitlements of permanent employment. In these circumstances, you may want to consider whether you continue along the freelance path or become an employee.
AND WHAT DOES IT MEAN FOR THE DIFFERENCE COLLECTIVE AND OUR CLIENTS?
At The Difference Collective, we continue to advocate our philosophy of ‘working differently’ and providing clients with flexible, agile, virtual, project-led support and communications solutions rather than placing permanent contractors. The vast majority of our engagements over the past three years would have seen our members working outside of IR35, should the legislation already have been in place so, in many respects, it’s business as usual.
We’re working with existing clients to review and assess the services being provided by our consultants and to carry out IR35 status determinations. We’re confident that most of our clients won’t see any change to the way we work together but we believe there is benefit to everyone in taking a proactive approach to the changes.
We don’t plan to take on employees or act as an intermediary for deemed employment payments by collecting tax on behalf of clients and will only be taking on project-led assignments. Where clients require contractors to work within IR35, we will be launching a new ‘introduction only’ fee to put our clients in touch with those contractors that are happy to work directly with clients – either within IR35 or as employees.
There is no doubt that IR35 will change – and in the short term complicate – the world of freelancing. But the need for high calibre, proven consultants to deliver projects and supplement in-house teams won’t go away. We predict that clients will look to retain resources on a project basis, pulling in specialist skills as and when needed. As a trusted, sector-specialist team of senior freelancer consultants, The Difference Collective provides an ideal solution to provide that purpose-built project support.
About the Author
Jo WIlliams is a freelance marketing consultant with more than 20 years’ healthcare marketing experience. She takes an insight-driven approach and has a keen eye for what’s new and making the biggest difference to brands in their marketing activity.