Although IR35 is the hot topic – IR35 itself is not new – it has been around since 2000. It is a piece of legislation that allows HMRC to collect additional payment from a contractor, where in reality the contractor is effectively an employee of their client – but is just choosing to operate through a limited company.
So why is everyone talking about it now?
New rules are coming in from April 2020, which are shifting the emphasis of deciding whether your working relationship is caught by IR35, from the worker to the end user in some circumstances. If that end user determines that you are caught by the rules, they either need to take you onto the payroll or deduct PAYE and NI from your invoice.
This blog aims to demystify the new rules so you can determine if it will affect you.
Off-Payroll Working – What is it?
Off-payroll working is a term used by HMRC to describe the situation where:
A worker/freelancer provides a service (eg themselves) to an end client, and invoices that client via their own limited company and CRUCIALLY – if that worker was providing that service directly to the end client (eg NOT via ABC Limited) then that worker would meet the employment test status (see below) to make them an actual employee of the client.
If off-payroll working applies:
- The end client is required to deduct PAYE and NI from your invoice, BUT
- You do not acquire any employment rights under the rules – so you have no right to SSP, SMP, holiday pay,pension etc
so not a great position to be in!
The Changes from April 2020
From April 2020 if your end user is a large or medium sized company, then it becomes their responsibility to assess whether you have the employment status of a “worker”. If they determine that you do, then the off-payroll working rules kick in.
Prior to April 2020 it was your responsibility to determine your status, and to deal with the IR35 legislation yourself.
(A medium company is one that meets 2 out of 3 of these criteria:
- turnover over £10.2m,
- over 50 employees
- balance sheet total of over £5.1m)
It is important to note that if your end user is a small company, the changes do not apply to them at all.
If it is a medium/large company then the following will happen:
- The end client must tell you that they are a large or medium size company
- The end client must assess your employment status and tell you what they have decided
- The end client will then deduct PAYE and NI from your invoice if they have concluded the off-payroll working rules apply
How will they assess my employment status?
The end client should start by using HMRC’s Check Employment Status Tool “CEST” which will give an assessment at the end of the questions.
It asks a number of questions about your working arrangements, such as “could you send a substitute to perform the task” and “does the end client have the right to determine your working hours”
If the questions are answered accurately and honestly, HMRC will accept the results of this test.
Once they have determined your status, they need to inform you of their decision by providing you with a Status Determination Statement. If you disagree, you can challenge the result, and they will need to come back to you within 45 days.
What is likely to happen?
These rules came into force for the public sector last year, and the outcome was for many organisations, they just decided to take everyone onto the payroll and to no longer engage freelancers, as the risk of getting it wrong was just too high. We are seeing the same already from some of the banks in advance of these changes.
Obviously, having PAYE and NI deducted from your invoice is going to affect your take-home pay, and if you are affected then there should be some negotiation about your future invoices!
It is important to note that the changes do not affect everyone, but there is, as is to be expected, currently widespread panic in the freelance world!
If your end client is a small company, there is no change.
However you are still responsible for determining your employment status, and I would highly recommend running through the CEST questionnaire to see how HMRC would assess your status, and if you should be applying the IR35 rules yourself.
If you have any questions, then as usual – get in touch!