IR35 is on every freelancer’s radar right now as the freelance workforce tries to make sense of the legislation. If you’re baffled by all things IR35 and how it applies to you, fear not. You’re not alone.

It’s a complex, and sometimes muddy, topic. In theory it should be easy to understand, but the reality is often more confusing. So what do freelancers need to know before navigating IR35?

What is IR35?

Let’s start at the beginning. IR35 is legislation brought in by HMRC to close a loophole allowing ‘disguised employees’ to slip through the tax-paying net. The initiative is part of wider efforts to clamp down on tax avoidance.

What’s a disguised employee?

A disguised employee is someone working on a self-employed basis, when the nature of the relationship is actually more akin to permanent employment. Before IR35 this meant an employer could take on a contractor, rather than hiring them as an employee. That way they wouldn’t need to pay NI or other contributions, and didn’t have the same responsibilities for looking after their staff.

For the worker, such as someone operating as a limited company, the arrangement meant lower tax rates than they would be subject to as an employee on the payroll. Of course, not all disguised employees come about as a result of dishonesty. Sometimes, it’s because business owners and contractors aren’t sure where the boundaries lie.

The main motive of IR35 is to determine a person’s employment status for tax purposes. Doing so ensures that businesses and freelancers pay the appropriate tax and contributions.

Some important things to know about IR35 

• It applies to all industries and sectors – not just creative industries and media (as some falsely believe to be true).
• Whether someone is within or outside IR35 can change from contract to contract, or project to project. It isn’t just a blanket rule which applies to the individual.
• If you fail to comply with IR35 regulations correctly, you could face financial penalties.

Does IR35 affect freelancers?

Yes, IR35 legislation does affect freelancers. If you’re ‘within IR35’ for a particular project or job, then this has implications on how you pay tax. It means you’ll be considered an employee for tax purposes, and the ‘client’ must therefore deduct Income Tax and National Insurance contributions at the same rate as a permanent, payroll employee.

It’s vital to remember that your IR35 status can change from contract to contract! 

If you’re outside IR35 and therefore not considered to be an employee for tax purposes, your bill will be paid in full without deductions. It’s then your responsibility to manage your own tax payments.

Who decides if a freelancer is within IR35?

Previously, the freelancer was responsible for establishing their own IR35 status. Since 6th April 2021, the onus is now on the client to decide, so long as they are a medium to large-sized private company.

A medium to large-sized company is classified as one which:

• Has more than 50 members of staff on its workforce
• Or has annual sales in excess of £10.2million.

For small private companies, the contractor is still responsible for determining their own IR35 status.

Some of the most common pointers that suggest you’re within IR35 include:

• You’re not invoicing a client directly (you could be invoicing an intermediary, for example).
• There is a Mutuality of Obligation between you and the client company. This means if there’s any obligation to give or accept work on either side. As a freelancer, to work outside IR35 you need to be able to demonstrate that you’re at liberty to turn down work offered to you.
• Your work isn’t being contracted by the client company directly.
• The client company has significant control over where and when you work. For example, you need to ask for time off, or you must work on the client’s premises. As a freelancer outside IR35, you should have autonomy over this.
• Your role is indispensable, and you can’t be substituted by anybody else.
• You’re not responsible for your own Public Liability insurance or Professional Indemnity insurance (where applicable).

This is by no means an exhaustive list, and we very much recommend seeking professional advice on the subject.

Contesting IR35 decisions

Hopefully you’re now feeling a little clearer on what IR35 is and how it affects you. Before you go, it’s worth knowing that you can contest a client’s verdict on whether you’re operating within or outside IR35. HMRC’s Alternative Dispute Service enables you to escalate the issue and contest the decision.

When starting work on a new contract or with a new client, make sure you have agreements down in writing to refer back to if necessary. It’s also worth doing this for any ongoing existing contracts.

Find more guidance and advice for freelancers, from those in the know.