I recently sat in on a webinar organised by The PR Cavalry and with speakers Lucy Flynn from Bexley Beaumont and Dawn Foden-Smith from Ainsworth Booth.
First of all, let’s look at the definition of IR35. A personal service company is usually a one-man/woman band set up as a tax avoidance method, and from April 2020 in the private sector the end-client is also responsible for deciding a freelancer’s status and whether they will be affected by IR35. If the end-client is a small business, for example, has under 50 people, then the freelancer decides their status.
When considering IR35, those affected need to provide service from a personal services company or an intermediary. If you are within IR35, the freelancer doesn’t get all employment rights (sick pay) but will have to do PAYE.
If the end-client is large, once they have decided the freelancer’s status, they will pass on the information. If they don’t pass on that determination, then they have to pay any additional fees. Of course, there is a dispute process that will be in place and the end client has 45 days to respond.
CEST tool checks IR35 status
This Check Employment Status for Tax takes you through a questionnaire, e.g. working arrangement, how work will be paid for, whether a worker can work for others. There are a number of examples to determine if you are treated as an employee. If you:
- have a helper that does your admin or work with another freelancer. If you pay that person, that is indicative of a true consultancy relationship. If you have help, and the end-client pays, then that’s not.
- were engaged to work on a specific project and the end-client shifts you into on another project and you don’t amend your contract, then you have more of an employed status.
- are using your end-clients equipment, then you are treated more like an employee
- are paid the same amount every month not dependent on results, that can look more like an employment relationship
- are really integrated into the client’s business, eg have own desk, go to parties, member of work gym, then you would be classed as an employee
- are reliant on one end-user and taken over a period of time, this could be deemed employed status
- end-client is insisting you need to work on their premises, you are more likely to be subject to IR35
Once you have completed the questionnaire, CEST will give its opinion about your status…sometimes it doesn’t know! You may need to change your status with the end client or accept the new employed status.
It’s worth talking to an employment lawyer if you are in doubt as it may impact tax and legal status.
Some answers to questions asked by freelancers during the session
If you are providing services through a personal services business (sole-trader) and in turn via an employment business (recruitment agency), then you do not have to consider the employment factors as you will be covered by the employment business.
Be clear at the start of all engagements. Think about the relationship and say this agreement is not intended to become an employment agreement and the end-client or the freelancer is not mutually obliged (mutuality of obligation test) to provide or do work.
For monthly retainers, as long as you can show that you have been engaged on various projects, you can provide a substitute and have control over billing, then you can show you don’t work as an employee.
For historic relationships, HMRC may come knocking if they deem you were caught within IR35, then they could be after you for the money. Under the new rules, it’s the end client’s decision, but before April 2020, it’s the freelancers. But HMRC says that they won’t be after you for the first 12 months unless it looks like you were deliberating deceiving them.
The more skilled a worker is, the less control they need, so experienced freelancers are more obviously engaged as consultants. not as employees.
If an end-client puts you onto payroll, then you can’t charge VAT.
So it sounds like it's time for many freelancers to clarify the terms of engagements, understand the situation and take it proactively to the client and negotiate.
Watch webinar here.