The freelancer's guide to IR35


A practical guide to help freelancers understand IR35

written in partnership with

Dianne Lambdin

HR Consultant and Employment Law Specialist

More than ever, businesses are changing the way they employ people. The traditional workplace 'norms' don't apply anymore.

Freelancing is now a credible, viable way for people in the UK to earn a living. As freelancers are usually classed as either self-employed or working through an intermediary (i.e., their own limited company or a service/personal service company), there are important legal and tax issues to consider.

In this guide

freelancer's guide to IR35

What is IR35?

HMRC will want to ensure that the correct tax is being received (i.e. PAYE and national insurance). IR35 is legislation designed to combat workers who fraudulently claim to be contractors for tax benefits, therefore, it's important that you are IR35 compliant.

what is IR35?

It's essential that, for tax purposes, the freelancer is considered to be genuinely self-employed and not, to all intents and purposes, an employee, otherwise, you and the client will be liable to pay the respective tax and national insurance due (and you may incur penalties).

IR35 will apply if you work for a client through your own Limited Company either directly or via an agency and the terms of your contract either on paper or in your actual working conditions are such that in reality you are really an employee of the client.


Practical advice for Freelancers worried about IR35

practical advice for freelancers on IR35

The main issue is to decide whether you are really 'employed' or 'self-employed' (this may vary with different contracts/assignments). HMRC will go far beyond a simple checklist when investigating IR35 cases so it's important that you understand how to assess whether you are inside or outside the legislation and what you can do about it.

You need to try and make sure that as many aspects of your work point towards self-employed status rather than employed. Much of this is quite easy to do – the following guidance sets out some of the main points to consider.

Direction & Control

How much control do you have over your work and how do you carry it out?

  • What work is carried out - does your client have the right to move you from one project to another as and when they like? If so, this would indicate employment.
  • When the work is carried out – does your client control the number of hours you work and the times you work? If so, this would indicate employment.
  • Where is the work carried out – can you decide where to do the work or does your client require you to attend the work premises? If the latter, this would indicate employment.
  • How the work is carried out – do you have to follow detailed instructions? Does the client tell you exactly what to do? If so, this is an indicator of employment. As a freelancer you should have the freedom to decide how to do your work.

Things you should do:

  • Ensure your contract and your actual working conditions are as flexible and free as possible from any kind of control.
  • Where possible, combine or alternate working from home and at the client's premises.
  • Don't keep regular hours, or at least not the same start and finish times as employees.
  • Make sure you decide which days you work and have complete control over the project.

Day to Day Working

It's important that your client (and their customers) see you as a contractor or freelancer. The more you are viewed as being part of the client's business the more likely this will indicate you being an employee.

Some things to avoid:

  • Being listed on their internal phone system
  • Having an internal email address
  • Managing employees of the client
  • Attending work social events (unless other suppliers are invited)

Provision of Equipment

An important indicator of self-employment is that you provide all of your own equipment e.g. laptop, phone, software, etc. Investing in your own equipment also indicates a degree of financial risk and that you are running your own business.

If the client provides you with equipment, this would indicate employment.

Financial Risk

If you have invested in your own equipment to satisfy the 'provision of equipment' factor, then you are already dealing in part with the financial risk element. Other indicators of financial risk would be purchasing your own assets, taking on employees or sub-contracting work to a substitute.

Payments

Always issue your own invoices (do not use time-sheets). Any expenses chargeable to the client should be included in your invoice (and VAT charged if you are VAT registered). You must keep all receipts.

Right of Substitution

Your contract should state that you have the right to substitute yourself with someone else for all or part of the project (or at least where you are unable to complete any part of it). It doesn't matter that the right is rarely exercised – but this clause goes to the heart of the nature of the arrangement (as the opposite is true of employees and workers who are engaged under a contract for personal services).

Your contract should also state that the client will always pay your company the fee, even when a substitute is used, and your company will pay the substitute. This can be a decisive indicator of self-employment.

Mutuality of Obligation

There should be no mutuality of obligation on the freelancer to undertake the work and, for the company, no obligation to provide any work.

Consider if any obligation does exist between you and your client – your contract should set out exactly what you expect from each other. If your clients pay you for your services and no other obligations exist between you then it is possible that Mutuality of Obligation does not exist and therefore you are not employed.

Show you are in Business on Your Own Account

If you are truly self-employed and running your own business, you should think and act like you are. Have business cards and stationery made with all your business contact details, set up a website, a company email, register your company with Companies House and HMRC (as appropriate). Work from your own office (even if that's at home).

Keeping records

HMRC can investigate any contract(s) held at any time in the previous four years (in some circumstances longer). Therefore, it's important to have records available which establish facts to assist any such investigation, and to act as an aide-memoire when you are trying to remember the detail of your assignments.

Although the list is not exhaustive, you should aim to keep at least the following for each assignment or contract:

  • Your written contract (or notes of any verbal contract)
  • What status you consider the contract to have
  • Why you consider that to be the correct status
  • A "real arrangements" letter, if you can get one
  • Any concurrent contracts/work
  • On-the-ground differences between yourself and permanent employees of the end-user

Further information and advice on this topic and a sample "real arrangements" letter can be found in IPSE's guide to IR35

Length of Engagement

If you have been working for the same client for a long time or if you have regular work from the same client then this may show that you are an employee - it is not conclusive but if coupled with lots of other factors pointing to employment, it could mean you're caught by IR35. Make sure you don't limit your options by signing a contract that states you cannot work for anyone else - this points to employed status.

Try to have more than one contract on the go at any one time, if you have one major contract lasting for a year or more, try to take on smaller contracts to run at the same time. This is one of the areas where freelance marketplaces can help.

 

How Freelance Marketplaces can help

Working through freelance marketplaces helps in a number of ways. For example:

Aside from the obvious benefit of simply finding more work, freelance marketplaces also provide a range and diversity of projects and clients. This is one of the clearest indicators to HMRC that you are a freelancer working on a number of projects, rather than a 'disguised employee'.

Remote working (which is most often the case when freelancing through a marketplace), quite possibly from your own home office, at times that suit you are other factors that reinforce your position as a freelancer outside IR35.

In a nutshell, freelance marketplaces by their very nature suit independent workers who genuinely fall outside of IR35 but it pays to be aware of the rules so that you have peace of mind to concentrate on expanding your portfolio and building your business!

Advantages for using freelance marketplaces

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