With more and more people becoming self-employed and working on a freelance basis, it can be hard to know whether or not the same tax rules apply as they do for full-time employees. In reality, there are in fact a few different rules and regulations that you need to be aware of. Perhaps one of the most important ones is IR35. For those who cross the boundary from self-employed to more permanent positions, it’s essential to understand this legislation, as investigations can be complicated and lengthy.
What is IR35?
Also known as off-payroll working rules, IR35 is a piece of legislation that is in place to combat tax avoidance. These laws are there to figure out whether a self-employed worker is cheating the system and avoiding tax. It’s been around since 2000, and it was introduced with the rise of people who registered themselves as a limited company for business purposes.
Is IR35 important?
HMRC created IR35 to try and tackle the issues surrounding what’s known as ‘deemed employment’. This is when organisations and business hire workers on a self-employed basis, normally through an intermediary such as a limited company, rather than on an employment contract.
The government describes these workers as ‘deemed’ or ‘disguised’ workers. By doing this, the organisation or business can save quite a large sum of money as they don’t have to cover National Insurance Contributions or offer any employment rights or benefits. IR35 steps in to defend workers’ rights from the employers, and also to cover the lost tax.
What happens if you don’t comply with IR35?
HMRC have predicted that they’ll lose out on £1.2 billion by 2023 due to disguised employment, so they’re trying to crack down on this.
If an organisation is found to be not complying with IR35, then both the employer and employee will have to make amends. The government may also potentially penalise both parties for breaking the rules. HMRC can request 100% of all unpaid taxes in a situation where companies or individuals haven't complied with IR35.
If you are deemed to be self-employed, then IR35 rules don’t apply to you. But if you are a more permanent fixture at the company, you will have to pay the same taxes as a regular employee.
Does IR35 apply to you?
IR35 can apply to just about anyone who works using a limited company or a personal service company, who then also provides a service to a business or organisation. If you are deemed to be self-employed, then IR35 rules don’t apply to you. But if you are a more permanent fixture at the company, you will have to pay the same taxes as a regular employee. There are a few criteria that determine whether you are an employee or self-employed:
Being self-employed means you choose which hours you do. However, if you are working the same amount of hours each week, HMRC may describe you as an employee.
HMRC could also invoke IR35 laws if you are receiving regular pay from your employer. For instance, if you a company pays you the same amount every week for a substantial time period.
If it can be proved that you have considerable involvement in the company, then IR35 could argue that you are an employee.
Self-employment denotes that you have a certain degree of control over your working environment, along with how and when you do the work. If you can affirm these criteria, you will generally be considered a self-employed contractor.
If it is only the self-employed contractor who can do the assigned work, and they can’t be replaced by someone else, then IR35 may deem them to be an employee.
For many years, IR35 investigations were not that common. Back in 2014, HMRC only investigated 23 people regarding IR35 misconduct. However, with new legislation recently having come into play, HMRC will be knuckling down. Make sure you discuss your status with your employer, as it is now their duty to ensure they are being compliant with IR35.