IR35 is crucial since it ensures that freelancers and contractors have the same opportunities as employees. But what is IR35?
IR35 is a new rule/law introduced by HMRC that is designed to crack down on tax avoidance by freelancers and contractors who operate as “disguised employees.” This has caused confusion and concern among many freelancers who are unsure of how this will affect them and their businesses. In this blog, we will explore what IR35 is, why it’s important, how to understand it, and why it affects freelancers. You can also learn some other interesting facts about the gig economy by checking our blog: 10 Interesting facts about gig economy
What is IR35?
IR35 is a tax legislation that was first introduced in 2000 to address the issue of “disguised employment.” This occurs when a freelancer or contractor is working for a client but their employment status is similar to that of an employee. The aim of IR35 is to ensure that such individuals pay the same amount of tax and national insurance contributions as they would if they were employees.
Under the new rules, it is the responsibility of the client to determine the employment status of the freelancer or contractor. If the client determines that the freelancer is working as a “disguised employee,” they will be required to deduct tax and national insurance contributions at source, in a similar manner to that of an employee.
When you are establishing your own business, one of the most difficult things to understand can be taxes. Here are a few brief explanations of the business taxes that small business owners should be aware of: How To Understand Different Types of Business Taxes?
Why is IR35 important?
IR35 is important because it helps to ensure a level playing field between employees and freelancers/contractors. It prevents freelancers from avoiding tax and national insurance contributions by operating as “disguised employees.” It also protects the rights of genuine self-employed individuals who are not affected by the rules.
In addition to promoting fair tax practices, IR35 also has wider implications for the future of work. The rise of the gig economy has led to a shift in the traditional employment landscape, with more individuals choosing to work as freelancers and contractors. While this offers greater flexibility and autonomy, it also means that individuals may not have access to the same employment benefits and protections as traditional employees.
How to understand IR35?
To understand IR35, it is important to first understand the concept of employment status. There are three main types of employment status: employee, worker, and self-employed. IR35 applies only to self-employed individuals.
The determination of employment status is based on a number of factors, including the level of control that the client has over the freelancer’s work, whether the freelancer is required to work exclusively for the client, and whether the freelancer is able to provide a substitute to carry out the work.
To understand whether you fall under IR35, you should review your contracts with clients and assess the level of control that they have over your work. You should also assess whether you are free to provide a substitute to carry out the work.
Why does IR35 affect freelancers?
IR35 affects freelancers because it puts the responsibility of determining employment status on the client. This means that freelancers who are deemed to be “disguised employees” could face additional tax and national insurance contributions, as well as penalties and interest charges if they are found to be non-compliant.
Freelancers who are found to be non-compliant with IR35 could also face reputational damage and difficulties in obtaining future work. This is because clients may be reluctant to work with individuals who have a history of non-compliance with tax laws.
To prepare for IR35, freelancers should review their contracts with clients and assess their employment status. If you believe that you may fall under IR35, it is important to seek professional advice and guidance to ensure that you are compliant with the new rules. Talking about contracts, you can check our blog about how to create a good contract and stay informed about that issue too!: 10 keys to writing a good and a clear freelance contract
You should also consider taking steps to diversify your client base and increase your self-employment status. This could involve taking on multiple clients and projects, as well as investing in your skills and expertise to make yourself more valuable to clients.
In conclusion, IR35 is a new rule/law that affects freelancers and contractors who operate as “disguised employees.” It is designed to ensure that such individuals pay the same amount of tax and national insurance contributions as employees. It is important for freelancers to understand IR35 and assess their employment status to ensure compliance with the new rules.
To prepare for IR35, freelancers should review their contracts with clients, seek professional advice, and consider diversifying their client base. While IR35 may seem daunting, taking proactive steps to ensure compliance can help freelancers avoid potential penalties and reputational damage.
In summary, IR35 is a significant change that affects the way freelancers and contractors operate. By understanding the new rules and taking the necessary steps to comply with them, freelancers can continue to operate successfully in the evolving world of work.