HMRC’s changes to IR35 – the rules that determine tax status for individuals working through limited companies who provide off payroll services to a client – recently came into effect. Tax can be a tricky topic, so we’ve broken down the changes, and explain why these regulations shouldn’t affect your income through Prolancer.
What is IR35?
IR35 was introduced in 2000, specifically looking at individuals who work through an intermediary (like their own limited company, often known as Personal Service Company) to offer services to a client.
The government put IR35 in place to ensure that individuals who operate through an intermediary like a PSC but behave in the same way as an employee, pay the same Income Tax and National Insurance as someone directly on the payroll. Typical behaviours that may deem someone an employee for tax purposes in this circumstance include the location of work (e.g. going into the office), set hours, being provided with equipment, having an email address with the company and so on.
It is important to note that while contractors who are found to be inside IR35 are treated as a ‘deemed employee’ for tax purposes, they are not ‘an employee’ of the client and are not entitled to any employment rights. The legislation is also applicable to agencies that contract workers to their company, but provide services to a third-party client.
What are the changes to IR35?
Changes came into force on the 6th April 2021 and are only applicable to work carried out on or after this date. Prior to the 6th April it was the responsibility of the intermediary organisation to determine if the contractor fell inside IR35 legislation when working with a client in the private sector. When working in the public sector (from 2017 onwards), it was the responsibility of the client receiving the services to determine if IR35 was applicable.
Now, medium or large-sized clients in the private sector will be responsible and liable for deciding if an individual using a PSC or similar intermediary falls inside or outside IR35 regulations, in line with practice in the public sector.
Private sector companies must have 2 or more of the following conditions to be deemed ‘medium or large’:
- An annual turnover of more than £10.2 million
- A balance sheet total of more than £5.1 million
- More than 50 employees
That means that the responsibility for ensuring the correct tax is paid has moved from the intermediary that the individual operates through (i.e. their limited company) to the client, depending on sector and size. When individuals work with small private sector clients, their intermediary will still be responsible for deciding where they stand with IR35.
How does IR35 work?
To determine if a contractor working through a limited company falls inside or outside the IR35 regulations, the responsible party must conduct an assessment which results in a Status Determination Statement. HMRC have created an online questionnaire to aid this process, but it has been widely criticised.
The responsible party (e.g. all public-sector clients, medium and large private clients, and intermediaries working with small private clients) have to show they have taken ‘reasonable care’ to come to their conclusion. You can read more about the types of assessment – such as blanket, role based and indicative – in this in-depth article from the Federation of Small Businesses covering IR35 and the appeals process.
If IR35 rules apply with these new changes, then Income Tax and employee National Insurance are now deducted from a contractor’s fees and paid straight to HMRC before the intermediary receives payment; the client will also pay employer National Insurance contributions but this cannot be taken from the fee paid to the contractor.
Contractors that fall within IR35 but are working with small sized clients are still responsible for conducting this assessment and informing their client accordingly.
Does IR35 affect me working through Prolancer?
First of all, IR35 only applies to individuals operating through their own limited companies, not sole traders. On rare occasions it may apply to limited liability partnerships. Therefore the IR35 does not apply to self-employed freelancers working through Prolancer.
At Prolancer we offer 2 kinds of hiring services, neither of which frame us as a formal intermediary.
1. Recruitment of an employee or a contractor:
Prolancer will help hirers to find and identify expert talent. The hirer is then responsible for creating a contractual agreement and paying their new employee/contractor via their company's payroll. Prolancer is not invovled with, and not responsible for, determining if the IR35 is applicable here – we only deal with finding the talent.
2. Projects - Freelancers working on projects through Prolancer:
Freelancers working on projects through Prolancer are not treated like an employee of their client. They won’t be involved in managing a company's team or receive employee benefits and rights; projects advertised on Prolancer also have defined scope and end goals. Freelancers on Prolancer are possibly working with multiple clients and on different projects at any one time; they aren’t restricted by the hirer on location, hours and how they work.
If you are a self-employed freelancer, the IR35 regulations don’t apply to you. You are responsible for managing your own tax payments.
If you are a freelancer working through an intermediary such as a Personal Service Company that you have set up, then these changes will affect how you interact with medium and large scale private companies, as it will be their responsibility to determine if IR35 regulations are applicable to the work you have carried out. For the reasons we have outlined, we would not expect for you to classified within the IR35 regulations. However, it is ultimately now the prerogative of the client – unless they are a small private client – to determine your IR35 and off-payroll status.
To sum it up
Simply put IR35 changes aim to crack down on individuals and businesses misusing regulations aimed at freelancers and contractors, to avoid paying tax and National Insurance. How effective this will be in practice, and if IR35 changes will unfairly discriminate freelancers is still to be seen.
If you are a self-employed freelancer working through Prolancer, IR35 regulations were not designed for you and shouldn’t affect you.
If you work through a PSC on projects through Prolancer, in principle IR35 changes shouldn’t affect your income, although your clients may now be managing your tax for the projects you complete.
Because this area of employment law is complex, we recommend seeking expert advice about your individual circumstances, to ensure that regulations are met. We also recommend looking at the official HMRC website.
- Useful webinar and resources from HMRC
- IR35 tax changes for the private sector – Which?
- Everything freelancers need know about IR35 (but were afraid to ask)
- A guide to off-payroll working (IR35)