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A string of high profile ‘IR35’ cases have emerged over the last few years, including Gary Lineker, Lorraine Kelly, Eamon Holmes and now, Adrian Childes. These individuals are famous TV presenters, working for the BBC or ITV through personal service companies (PSCs) on a freelance basis. This means that for tax purposes they are able to shelter their income at corporation tax rates whilst taking dividends to manage their personal tax liabilities.  However HMRC believes their working practices and the risks they face, mean they are ‘disguised employees’ and should be taxed in the same way as other individuals who work as employees.

From a tax perspective, HMRC has argued, or is currently arguing that these individuals should be taxed at source as if they were on the payroll, because they are caught by the provisions of IR35. IR35 is designed to root out ‘disguised employment through off payroll working’ and whilst these celebrities get a lot of media attention for potential non-compliance, hundreds of thousands of ordinary freelancers, contractors and independent consultants could also face the same scrutiny.

Whether you are self-employed or limited company operating on a consultancy basis, this article explains why IR35 is such a tricky piece of legislation and how to be sure you are not caught out.

Understanding IR35 and how it applies to contractors

IR35 essentially exists to ensure that on and off-payroll workers are all taxed fairly, with contractors facing the same tax and national insurance liabilities as employees. For self employed individuals, the current rules state that it is generally the company to whom they provide services that needs to ensure they are genuinely self employed. This will not change following the Mini Budget, responsibility for determining status will continue to lie with the entity that is engaging the service provider. Different rules apply to contractors providing their services through limited companies. According to the current rules, whether the PSC or the ultimate contractor is responsible will depend on the size of the ultimate contractor to whom they are providing services:

• Public companies together with medium and large-sized private sector contracting companies are responsible for determining the employment status of any contractors they use;
• Small private sector contractor companies are not subject to these rules, so the PSC itself is responsible.

Therefore if you are providing services to a small private sector company through your PSC, the IR35 legislation applies directly to your PSC. Following the Mini Budget, the public sector and larger company rules will be repealed from April 2023. This means it will once again become the responsibility of the PSC / contractor to determine their correct status and comply with IR35.

Whether you are caught by IR35 is subjective and therefore difficult to ascertain completely. Obviously such things as holiday pay, pension schemes, set hours of work, hourly rates of pay, having a contract for services and a long term permanent work commitment all point to employment.

The deciding criteria for self employment are more subjective and have largely been decided by decisions made in various cases taken before the courts, where the following have variously been found to be indicative of self employment:

The ability to set the company’s own rates of payment for specific contracts;

• No obligation to receive or complete work;
• The ability to accept or refuse work;
• The opportunity for risk and reward in undertaking a contract;
• The ability to provide a replacement.

Whilst these are indicative, they are not absolute, and any contract must be a contract for service that reflects the actual terms of that contract.

Here are some questions to consider, and if you find yourself answering ‘NO’ to any of them, it would be prudent to investigate further:

• Does the freelancer/do you have the right to hire other people to carry out your work or to work with you? If so, would these workers be answerable to, and paid by, you the freelancer directly?
• Does the freelancer/do you have the right to decide how the work is to be carried out, and when it will be done, as long as this is within the overall project deadline?
• Does the freelancer/do you provide the basic tools and materials required for your work – very often this could be a laptop?
• Is the freelancer/are you paid on a job-by-job basis for an agreed amount per job, regardless of how long it takes? Can they/you make more money by working more efficiently? Could they/you incur a loss if a job overruns or they need to make revisions?

How to check status for IR35 compliance

HMRC has created an online tool called Check Employment Status for Tax (CEST) which helps to assess the status of a freelance worker. This provides a definitive answer to whether PAYE and NICs should be automatically deducted through the payroll. If you are concerned whether contractors you use may be caught by IR35, or if you are a contractor and concerned about your own status, this is a useful resource.

IR35 rules post April 2023 in summary

The IR35 / off payroll working legislation is to be repealed in April 2023, and the previous IR35 legislation will again apply. In the meantime, the off payroll working legislation remains in place until April 2023.

• If you work through a PSC for a medium or large end client, responsibility for operating IR35 will revert to your company from April 2023.
• If you work through a PSC for a small end client, the IR35 legislation continues to apply to your PSC directly, as it does now.
• If you work on a self employed basis, the responsibility for determining employment status remains with the end client and will continue to do so after April 2023.

If you are a contractor and concerned about IR35 or if your business uses contractors and you would like some further support, please contact partners@rjp.co.uk.