084: What does IR35 mean for UK motion design freelancers? w/ Andy Chamberlain
Disclaimer: This podcast is for general guidance only and discusses the legal position in the UK at the time of publication unless stated otherwise. You must take legal advice and not rely on the information provided in this podcast before taking action. We do not update our podcasts and therefore, past podcasts may not reflect the current legal position. There are 5 million self-employed people in the UK and if you’re listening to this episode, it’s likely you’re one of them. If you’re a freelance motion designer you’ve probably heard about the IR35 tax law - but what does it mean for you and the way you do business? In today’s episode, you’re going to find out. About Andy Chamberlain Andy Chamberlain is the Director of Policy for The Association of Independent Professionals and the Self-Employed (IPSE). IPSE is the only non-profit organisation in the UK providing support to independent professionals and self-employed people in the UK. What is IR35 and does it affect me as a freelance motion designer in the UK? IR35 is a term used to describe two sets of tax laws that stop what is known as “disguised employment”. This is when an individual acts like an employee and is treated like an employee but they disguise that employment by portraying themself as a limited company rather than an individual. By doing this, both the individual and the employer who is hiring them essentially pay less tax - however, it’s illegal and a form of tax evasion. IR35 will only affect you if you’re an individual operating as a limited company. If you are a sole trader, it does not apply. So what is changing with IR35? As it stands, the government is changing the way that IR35 works in the private sector - moving the responsibility from the individual receiving the payment to the end client. The issue with this is that now many individuals are having to pay tax like an employee even though the company they work for gives them no employee benefits. As an employee, when you get paid, the amount you receive has already had the tax and national insurance deductions taken out of it. Under new IR35 rules, the same will now happen for self-employed people. This is making companies less likely to hire self-employed people because they don’t want to spend time putting them on their “books” and making tax deductions if they won’t be with the company for very long. Therefore they are now advising self-employed people to work under an umbrella company that will make those tax deductions for them instead. This is because if they pay someone through their payroll, they have to make employers national insurance contributions which is an additional 13.8%. Umbrella companies also don’t want to have to pay the 13.8% so they say to the individual “we need you to reduce your day rate so that we can afford to pay your employers national insurance contributions.” So who benefits from this new system? The only person who is really benefiting from this new system is neither self-employed people nor the end client - it’s the government. Rather than waiting a year for a self-employed person to submit their tax return, they are now able to gather a lot more tax from self-employed people more quickly. End clients are now worried - because if they say that IR35 doesn’t apply to a contractor they are working with and carry on paying them their gross pay as before, HMRC can approach them at a later date and they will be held liable. Because IR35 is so complicated, many end clients are choosing to put all self-employed workers under the IR35 rules rather than risk being penalised later on down the line. Does IR35 apply if I am a sole trader? IR35 only applies if you are a self-employed person working as a limited company and not if you’re a sole trader. Historically end clients have preferred to work with people who operate under a limited company because it mitigates their risk. For example, there are some laws that apply whereby if a sole trader didn’t pay the correct tax, the person who paid them could be liable. If you currently have a limited company and are concerned over the implications of IR35 on you and your freelance business, you could consider dissolving your limited company and become a sole trader, provided your clients were still happy to work with and pay you on that basis. There are benefits and drawbacks to being a sole trader or a limited company. Ultimately, only you can decide what is best for you. Am I inside or outside IR35? Andy explains that for employment to exist, you need to have each of the following: Personal service - one individual required to do the work themselves, they cannot send a substitute. If you feel you can send a substitute to do your work, this is one of the key ways in which you could dispute an IR35 claim. Mutuality of obligation - is the end client obliged to provide the contractor with work and is the worker obliged to accept that work and do it? Contractors are able to turn down work, whereas employees are obliged to carry out any work they are given. Control - how much control does the individual have over the work they are doing? If you are an employee, the employer has the right to control your work. However, if you’re a freelancer, you are largely able to dictate your own work and the way in which you produce it. If you can prove that any one of these three elements does not exist in the end client relationship, then IR35 does not apply to you. What should I do as a freelance motion designer to prepare for this? Andy advises freelance motion designers to consider what factors distinguish them from paid employed inside the companies that they are currently working with. If you are unsure whether IR35 applies to you or not, you can use the Check Employment Status for Tax tool (CEST) on the Government website, print out the results and show them to your client. Small company exemption rules The rules we have covered so far in regard to IR35 tax rules only apply to end-clients who are medium or large in size. Small companies don’t have to make these considerations under the small company exemption rules. A small company has to meet two of the following three criteria: The company has less than or equal to 50 employees The company has less than or equal to £10.2 mil turnover Less than or equal to 5.1 million on their balance sheet Protecting yourself with a Statement of Work Contract A statement of work is a type of contract that sets out the set deliverables and milestones required for you as the contractor to carry out the work. Payment is then on delivery of those milestones. If you have a contract like that then it makes it very hard for anyone to claim IR35 applies to that written contract, so long as the work carried out matches what was in the contract. A Statement of Work Contract could be a great way to carry on working as you have been with no IR35 implications. If you’re unsure about your existing contracts, consider paying to get them independently reviewed. Andy finishes off the episode by answering some frequently asked questions that have been submitted by Motion Hatchlings, so make sure you listen to the end to see if your questions have been answered. Ultimately, the best advice around IR35 is to make sure you have researched the topic and are aware of your rights should your clients try to claim you are within IR35 when you know you are not. Do you have any other questions about IR35? Do you think it’s going to affect the way you work? Leave a comment on the episode page and let us know! Read the full shownotes. Find more guidance on IR35 on the IPSE website. Follow Andy on Twitter and LinkedIn.