IR35, also known as the off-payroll working regulations, is something that affects both self-employed freelancers and businesses alike. Freelancers and self-employed workers need to be aware of whether they fall into the IR35 regulations whilst businesses need to ensure that they are treating someone as a freelancer when they actually fall into the remit of IR35.
In this IR35 guide, we’ll talk you through the off-payroll working regulations, including what IR35 is, how these regulations affect businesses and how to determine whether you are inside or outside IR35.
What is IR35 regulation?
This is a question asked by many people who are unsure of where they stand when it comes to the IR35 legislation. So, what is IR35 and who does it affect?
IR35 is also known as the off-payroll working regulations. That’s because it relates to workers that are treated as self-employed freelancers for tax purposes, despite actually working as an employee.
The legislation is designed to prevent workers from avoiding taxes through pretending they are not employees when in actual fact, they should be paying PAYE tax and National Insurance contributions. It also ensures that self-employed workers who are being treated as employees by an organisation are given the same employment rights as actual employees, such as sick leave and annual leave.
Who does IR35 apply to?
IR35 regulations apply to anyone that provides services to another organisation. They may be providing those services as a self-employed worker, through their own limited company or through a personal service company.
The main types of worker that may be affected by IR35 are:
Freelancers – workers that provide their services to organisations as a sole trader.
Independent contractors – self-employed workers who provide services through a limited company.
As a general rule, if that worker is treated as an employee by the organisation but is financially compensated as a contractor, they may be in breach of the IR35 regulations.
Why was IR35 brought in?
IR35 was brought in to ensure that all workers under the PAYE regulations were paying a fair amount of tax. This is because it’s generally accepted that self-employed freelancers don’t pay as much tax as someone who is an employee and works for another company.
This means, if you are being treated as a freelancing worker for tax purposes but are being treated as an employee by the organisation you are working with, it’s likely that you are saving more of your income than you should be.
By introducing IR35, HMRC hopes to ensure that everybody pays their fair share of tax, regardless of whether they’re employed or self-employed.
Not only that, but IR35 also ensures that workers that should be classed as employees are being given the employment rights that they are entitled to, such as sick pay and holiday entitlement.
Who is impacted by IR35 regulations?
It isn’t always straightforward when you’re trying to work out whether you are impacted by IR35 regulations. Let’s take a look at some of the criteria used by HMRC when deciding whether a freelancer or independent contractor is inside IR35 regulations.
Potentially inside IR35
Likely outside IR35
Control over how, when and where work is completed
The organisation has control over these things
The worker can decide how, when and where their work is completed
Work must be completed by the worker personally
Work can be outsourced or another worker sent instead
Expectation and obligation of work
Work is provided regularly and the worker is obliged to complete it
There is no expectation of regular work and the worker is not obliged to accept work
Provision of equipment
The client provides the equipment for the worker to complete the work
All equipment is provided by the worker
Benefits such as sick pay, pension, bonuses and holiday pay are provided
No benefits are provided by the client
However, it’s always best to check with a qualified accountant if you are unsure whether you fall under the IR35 regulations. This will help to ensure that you don’t fall in breach of the regulations, leaving yourself open to potential fines from HMRC.
How to check whether you are inside or outside IR35
It can sometimes be difficult to determine whether you’re inside or outside of IR35. However, there is a way that you can check what your status may be, by using the Check Employment Status for Tax (CEST) tool on the HMRC website.
When you use the CEST tool, you will be asked a series of questions about how you provide your services. After answering these questions, you will be given a result detailing whether or not your services are inside of the off-payroll working rules.
This tool can also be used by businesses that outsource work to a contractor, to ensure that the contractor should not be an employee under IR35 regulations.
What happens if you don’t comply with IR35?
If you don’t comply with the IR35 legislation, HMRC has the power to investigate your business and enforce a penalty for breaking the law. The penalty that will be given will depend on whether you knew that you were inside IR35 regulations and whether you attempted to conceal this from HMRC.
The potential penalties are as follows:
30% of your unpaid tax bill if HMRC decides that you were careless about your employment status but did not know that you fell into the IR35 regulations.
70% of your outstanding tax bill if you knew that your fell into the IR35 regulations and decided not to act upon this.
100% of your unpaid tax bill if you are found by HMRC to have actively attempted to conceal your IR35 status and your underpayment of tax.
What triggers an IR35 investigation?
There are a number of factors that can trigger an IR35 investigation.
Some common triggers for an organisation being investigated for IR35 breaches may include:
An individual receiving a P45 when they start working for you
You receive a letter from HMRC stating that somebody is in the wrong tax category and asking you to clarify their employment status accordingly.
You’ve recently outsourced work to a contractor
A member of your staff is being treated as self-employed for tax purposes, although they’re actually an employee of yours.
You have not filed the correct P11D forms for your employees or contract workers
Alternatively, an individual who is self-employed or trading through a limited company could also be investigated under IR35. Triggers for this may include:
The individual has a limited company, but is single-director and does no other business
They have never filed any self-assessment forms or paid any taxes
They work full time for another employer and only trade through their limited company on the side.
It’s important to keep in mind that there could be several different reasons why you may be investigated under IR35. It’s always better to be safe than sorry, so if you have any doubts about whether or not a contractor should be considered as an employee for tax purposes, err on the side of caution and speak with a qualified accountant who will be able to advise you accordingly.
How far back can HMRC investigate IR35?
You might be wondering just how far back HMRC can go to investigate IR35 breaches. The truth is, HMRC is able to go back as far as 20 years to investigate potential IR35 breaches if they have reason to believe that you may have committed fraud or deliberately avoided paying your taxes.
However, if HMRC deems that you have made an honest mistake and were not aware of how IR35 regulations applied to you, they will usually only go back four years.
What happens if I am found to be inside IR35?
If a worker is found to be inside IR35, this means that their work reflects that of an employed worker rather than a self-employed individual or contractor.
If you are found to be working outside of the law, there are a number of consequences for both you and your hiring business.
You can be held liable for any unpaid tax that was due on the money paid out to the worker in question under employment PAYE rules.
The company who hired you could also face financial penalties if they failed to keep their side of the agreement and use a company or agency operating under IR35.
What does IR35 mean for businesses?
Whilst most people think that IR35 is all about freelancers saving money on their tax bill, it’s also about businesses making sure they are meeting legal obligations.
If you’re a business using independent contractors to provide services to your organisation, you need to be aware of whether or not they are being treated as an employee by your organisation.
In most cases, self-employed workers will be treated as a freelancer for tax purposes and won’t have to pay PAYE tax and National Insurance contributions. However, if you’re classing someone as a contractor when in fact they should be an employee, this is likely to be in breach of the off-payroll working rules and you could be liable for a hefty fine.
If this situation does arise, it’s likely that the worker won’t have paid enough tax and National Insurance contributions due to not being treated as an employee by your organisation.
HMRC understands that businesses make mistakes and if you have been classing someone as a contractor when they should have been treated as an employee, it may be a genuine mistake on your part.
Whilst the changes to the off-payroll working rules have been in effect since 6th April 2017, many businesses are still unaware of them and could be unwittingly breaching the law. By using the CEST tool, you can check your status to ensure you don’t face a hefty fine from HMRC for breaching the rules.
Does IR35 apply to freelancers?
Freelancers, sole traders and contractors should all be aware of the IR35 regulations, as these regulations apply to anyone that provides services to an organisation. However, the freelancer will only be classed as being inside IR35 if they should be classed as an employee by the company that they provide services to.
How do I know if HMRC is investigating me?
If HMRC decides to investigate you under IR35 regulations, they will inform you that they are conducting an investigation into the off-payroll working rules by letter. Within this letter, they may request further information about your contracts and how your services are provided to your clients.
How common are IR35 investigations?
It is unclear how common IR35 investigations are, as HMRC does not disclose these figures. However, it is known that there are over 250 IR35 investigations each year. This could mean 251 investigations annually, or 1,000 investigations per year – there is no way of knowing just how common this type of investigation is.
IR35 regulations apply to individuals that provide their services to an organisation, either as a freelancer or an independent contractor. You might also hear these regulations referred to as the off-payroll working regulations, as they apply to those workers who are using sole trader status to work as an employee, without paying the usual taxes or National Insurance Contributions that employees are required to make.
We hope this IR35 guide has given you an insight into these regulations, as well as explaining the criteria that HMRC follows when deciding whether an individual is inside or outside IR35 regulations. If you’re unsure of your employment status, it’s always best to consult with a qualified accountant. They can assess whether you fall inside or outside IR35, helping you to avoid any potential financial penalties later down the line.