For many people, the new year is a time for a fresh start – whether that’s a lifestyle change, or a new way of working.
Contracting is often an appealing option for those looking to make a change, offering a level of flexibility, freedom and independence that’s hard to find as an employee.
In recent years, however, anxieties have built among freelancers and contractors – particularly in the public sector – surrounding a piece of tax legislation known as IR35.
With further changes set to affect the private sector in 2020, this is something to keep in mind if starting out as a contractor is one of your resolutions this year.
IR35 and disguised employment
To understand IR35, you first need to get your head around the issue known as ‘disguised employment’.
This is where a person works in much the same way as an employee, but classes themselves as self-employed in order to avoid paying higher rates of tax and national insurance. This is done by working through an intermediary, which is usually a limited company.
The legislation uses several different tests to determine whether someone is disguising their employment in this way.
In theory, that doesn’t sound like a bad thing for those who are genuinely self-employed – but critics have argued that the complexity of the rules means limited company contractors are at risk of being unfairly caught out.
Until 2017, the IR35 rules gave workers the responsibility to determine whether they were classed as employed or self-employed for the purposes of tax.
But reforms to the legislation in the public sector shifted that responsibility to the organisation engaging the worker.
It was announced in Budget 2018 that the same changes will be rolled out in the private sector in April 2020 – so how this will work and the way it might affect you is something to keep an eye on over the next year.
Criticisms of the legislation include concerns that companies hiring contractors are more likely to avoid risk by categorising large groups of workers as inside IR35, rather than assessing them on a case-by-case basis.
HMRC’s Check Employment Status for Tax (CEST) tool, which is intended to help workers identify their employment status, has also been accused of inaccuracy.
More generally, many have said the complexity of IR35 is what makes it hard to implement effectively.
The Association of Independent Professionals and the Self-Employed said the rules are “so complex and crude that genuinely self-employed people will be swept up and in many cases taxed out of operation”.
Are you inside or outside of IR35?
You might have heard the terms “inside” and “outside” used with regard to IR35.
Essentially, they’re a way of talking about whether you fall into the category of employed or self-employed under the rules.
If you’re inside the legislation, you’ll be considered employed for tax purposes. You can still work through your limited company if this is the case, but your pay will be taxed under PAYE.
If you’re outside of IR35, you’re considered to be genuinely working on a self-employed basis.
You might be outside IR35 if you:
- have a high level of control over how and when you work
- take on financial risk
- have no obligation to keep providing work
- provide your own equipment
- have the option to provide a substitute if you choose.
This isn’t always straightforward, so it’s important to take advice from an expert about your employment status as a contractor.
IR35 is a particularly complex and controversial area of tax legislation, but we can help you navigate it.
Get in touch if you’re thinking of starting as a contractor, or to discuss how the changes to IR35 will affect you.