Changes to the IR35 rules came into effect on 6 April 2021. This has caused quite a commotion but why, and should you be concerned? In this post, we will explore the latest changes and their impact.
Media coverage of the impact of the changes
Much of the media coverage over the past months about the IR35 rules has concentrated on the effect of the changes to the rules rather than the IR35 regime as a whole. Various commentators have been emphasising that not only freelance individuals but also their business clients need to consider the impact of the changes on them. In particular, the media have quite rightly focused on whether and how freelancers and their clients are affected by the rule changes, and what action they need to take in response.
If you have seen some of that coverage, you might be forgiven for concluding that the changes will affect all freelancers and their clients from 6 April 2021. We wonder whether the media coverage has focused too much on where the rule changes do impact on the world of freelance work without also clarifying those who won’t be affected.
To redress the balance, we invite you to consider the following situations in which, although the IR35 regime does or might apply, the rule changes themselves will not have any impact on a freelancer and/or their clients.
To keep things simple for our present purposes, we will look only at private sector clients. (Other rules apply to public sector clients.)
Where do the changes not impact on freelancers and their business clients?
If, as a freelancer, you only work for a client as a self-employed individual but do not provide your services to them through a personal services company (“PSC”) or other intermediary company, IR35 rules (pre- or post-April 2021) do not impact on how you have to be paid by a client. In short, IR35 will not apply to you or your client at all if you do not use any type of intermediary company. You will, however, still need to satisfy yourself and HMRC that you are genuinely self-employed, and not in law an employee of a client in order to be paid gross by your client.
So, do IR35 rules apply to a freelancer and/or their client where the freelancer does work for them through a PSC? Possibly. The IR35 rules both pre- and post-6 April can, but do not necessarily, still apply to them. However, there is a distinction between the pre- and post-April situation, as follows.
The new rules only relate to the mechanics of determining a freelancer’s status
The rules both pre- and post-April are concerned with the status of the freelancer, namely whether or not they are to be treated as if they were employed rather than self-employed, and the consequences to how they are to be paid where they have to be treated as if employed. The effect of the 6 April rule changes is to add to that pre-April regime an additional layer of rules which apply in some cases. The changes are not about whether the freelancer is to be treated as if employed or self-employed, but instead on how that status is to be ascertained. In some cases – outlined below – but only in those cases, instead of the PSC having to determine that status, it is the client’s responsibility to do so, where so required by the changes.
This switch in responsibility to the client only applies where it is “medium” or “large”. Factors such as size, turnover, etc. of the individual freelancer and their PSC (and any other intermediary companies) are not relevant for this purpose.
The key test of whether the rule changes affect the freelancer or the client is whether the client is “small”. If it is, the PSC has the legal responsibility to determine the freelancer’s status vis-à-vis that client, just as the PSC did before 6 April. As you will see from the test outlined below, many of our customers and other readers will be “small” business clients, or they will be freelancers or PSCs working for business clients who are “small”. In that case, the changes do not affect them in relation to a work engagement. A client is small if it is in the private sector and at least two of the following apply to it:
- its annual turnover is less than £10.2 million;
- its balance sheet total is less than £5.1 million;
- its employees number less than an average of 50 in the year.
Does IR35 apply at all if the client is exempt as “small”?
Where the exemption applies, it only has the effect of releasing the client from the duty under the post-April IR35 rules to determine the freelancer’s status. In other words, the “exemption” does not take the IR35 regime out of the picture altogether. This means that even if the client is “exempt”, the pre-April IR35 rules will still apply where they require the freelancer to be treated as if employed, with the result that the client has to pay the PSC less PAYE deductions.
Conversely, if the exemption does not apply, it is the client under the post-April IR35 rules that has to determine the freelancer’s status under the pre-April IR35 rules. However, if the client then determines that the freelancer is to be treated under the pre-April IR35 rules as self-employed, the client can make gross payments, i.e. it will not have to pay the PSC less PAYE deductions.
In short, whether the client is exempt and what the freelancer’s status is are two separate questions. The freelancer’s status has to be determined in each case according to the same criteria, and the question of exemption is only relevant to ascertain whether it is the client or the PSC which has to determine the freelancer’s status.
Views about the IR35 regime as a whole cover a broad spectrum. Many who are in favour of the IR35 regime (including the new rules) may hold that view because they are not themselves freelancers, PSCs, or clients of either, and they are not burdened with its direct effects. They simply see IR35 as a good and effective measure to prevent tax avoidance by freelancers. At the other end of the spectrum, many freelancers using PSCs and their clients see IR35 as an unfair set of measures, and would gladly abolish IR35 completely. Freelancers and their clients alike see IR35 as creating an unacceptably high tax bill for freelancers and a heavy administrative burden for freelancers, PSCs, and their clients.
IR35 and self-employment template documents and guidance notes
We have a wide range of materials on our website which can help you with IR35 and self-employment issues. We recommend that you read our business information pages which you can see here: Business Information pages on Employment and Self-employment and here: Business Info on IR35 and that you also look at our guidance notes and range of template documents that you can use to create forms of agreement between a client and a freelance worker or intermediary company which you can see here: Self-Employment and Freelancer Contracts and here: IR35 And Other Company Contracts. These templates also include a form of IR35 Status Determination Statement template which is designed to save time when a client has to complete a status determination statement to comply with the post April 2021 IR35 rules.