Help, I am being told that I am to be inside the IR35 rules!!!
In April 2020 the IR35 rules are being extended to incorporate the private sector to bring it in line with the public sector that has been within these rules since April 2017. This change will affect a large number of freelance staff that have been working through either Limited Companies or Personal Service Companies. Let me be clear, I am not an expert on tax law or the IR35 (off-payroll) rules, but what follows is the latest information and how I believe they will affect freelance staff (especially site engineering staff).
Topics covered in this article.
- What is changing in the Private sector from April 2020?
- What did HMRC say?
- What are the IR35 (off-payroll) rules meant to achieve?
- The IR35 Status Determination Statement (SDS).
- Transfer of employment tax liabilities to another relevant person.
- Where does the new IR35 (off-payroll) rules leave the Freelance Engineer?
- It will be your employer to decide if you are in IR35 after April 2020.
- What can the freelance engineer do to be outside the IR35 rules?
- Set your Working Practices and Appearances.
- Nurture and look after your limited or personal services company.
- Make sure you promote your company’s name and specialties.
- Manage how you engage with prospective clients and then how to work with clients.
What is changing in the Private sector from April 2020?
Back in July 2019 the UK Government published draft legislation that confirmed the rules (known as IR35) which have applied to public sector since April 2017 are to be extended to the private sector from the 6th April 2020.
Some of the changes coming in April 2020 include
1.) It will be the responsibility of the end client to determine the status of the Limited Company or Personal Service Company in relation to IR35 (off-payroll) status.
2.) HMRC are introducing a new term referring to the IR35 (off-payroll) decision. This term is “status determination statement” (SDS) and must be passed down from the client.
3.) There will be a small business exemption in line with the Companies Act 2006 definitions. A small company would be one that has a turnover of less than £10.2m, a balance sheet of less than £5.1m and up to 49 employees.
4.) HMRC have a CEST tool available to Check Employment Status for Tax. This tool however is not compulsory, and neither is there a formal appeal process for it.
What did HMRC say?
“The aim of the legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICS) through the use of intermediaries, in circumstances where an individual worker would otherwise, for tax purposes be regarded as an employee of the client”
What are the IR35 (off-payroll) rules meant to achieve?
The IR35 (off-payroll) rules were introduced back in the year 2000. Their aim was to tackle what HMRC saw as disguised employment of contractors as they supplied their services via Limited Companies or Personal Service Companies.
The IR35 Status Determination Statement (SDS).
From (or possibly before) the end client must confirm the IR35 Status of the contract with the worker (or contractor) by providing a ‘Status Determination Statement’ (SDS). This must be provided in writing to the PSC worker. If an agency is involved between the end client and the worker, then a copy must be supplied to the agency. This places the responsibility for administrating the SDS on the end client or the agency.
Transfer of employment tax liabilities to another relevant person.
This legislation is designed to ensure that the organisation responsible for issuing the SDS, or the agency, is responsible for any employment tax liabilities arising from the contract.
This legislation also allows HMRC to recover tax liabilities from another ‘relevant person’. The relevant person is any party involved in the payment to the worker. This means HMRC can recover tax from the highest party in the worker supply chain which is not complying with the legislation. HMRC believes this will ensure compliance with the rules across all parties involved in the labour supply chain.
Where does the new IR35 (off-payroll) rules leave the Freelance Engineer?
So far, we have found out what is happening with the IR35 (off-payroll) legislation for the private sector after 6th April 2020. But how does this affect the Freelancer? As the freelance Engineer, you first need to decide if you work for your own company, or do you work as an employee for another company through your own limited company or personal service company.
Remember that it will be your employer that will decide whether you are inside or outside the IR35 legislation. The easiest way, I think, to determine whether or not you are going to be inside IR35 is to consider if you feel like an employee during the contract. If you feel like you are an employee, then you will probably be within the IR35 rules.
To help you decide if you are going to be inside the IR35 legislation then consider the following questions and answers.
Q.) If you were unable to provide the services personally, would your company be able to send a substitute with equivalent skills, qualifications and experience?
A.) If for example you were sick or possibly injured and you have nobody that can cover the work that your company has contracted to do, then this will count towards you being inside IR35. Furthermore, if your contract stipulates your presence as the only one acceptable, this would be more like an employer/employee relationship and the client would deem you to be inside IR35.
Q.) Have you ever actually provided a substitute?
A.) If you haven’t ever provided a substitute person in your place, then this will count towards inclusion within the IR35 legislation. Also, if you don’t have anyone you could substitute in your place this will count towards inclusion within IR35.
Q.) Do you carry out any of the services from your own office?
A.) If you must be at a place of work stipulated in your contract, just like an employee would have a place of work defined for them. But remember some employees can work from home too.
Q.) Does your company have to work set hours stipulated by your client?
A.) Are required to have set hours at work, for example 8am to 5pm Monday to Friday, then this would be similar terms an employee would have and will count towards inclusion within IR35. This would also include having to stay at your place of work until your allotted finish time, although in reality you will be given a task to do, by your employer, until your finish time.
Q.) Other than observing client specifications, are you told how to do the work?
A.) You do not have the freedom to do your work in the manner you think is the best way to do it. Furthermore, you will have to do it in the order set by the employer. If you are being instructed on how to perform your role throughout your working day, then you are likely to be included within the IR35 rules.
Q.) Do you need to seek permission from your client to take time off?
A.) You required to follow a process in order to take time off, not including sickness days, with approval from a line manager. This may well include submitting a holiday request form well in advance and can this request be denied. If holiday requests can be denied, then this would count towards inclusion within the IR35 rules.
Q.) Are you obliged to carry out tasks not covered within the scope of your contract?
A.) Most permanent employment contracts will specify what role you will be carrying out. But your employer will reserve the right to delegate tasks not covered within your role. For example, an employee could be requested to collect or deliver an item of machinery while the role they are employed to do is cleaning the offices. An extreme example but proves the point that the employee has an obligation to carry out tasks they have been given.
Q.) Does your notice period exceed 30 days?
A.) A permanent employee would generally have a notice period of at least one calendar month and no specific length to how long they can work for the employer. If your contract has a rolling date for finishing (no specific end date) then this would also count towards you being within the IR35 rules.
Q.) Does your company carry any business insurances?
A.) Legally, any company with two or more employees needs to have Public Liability and Employers Liability Insurance in place. If your company has no insurance in place then this would put you at risk (should anything happen) and also count towards being in the IR35 rules. Other insurances, for example Product Liability Insurance or Professional Indemnity Insurance, would only be needed if you were selling products or offering design services that would be used by third parties.
Q.) Is your company financially liable to correct any faulty work?
A.) During the course of carrying out your work, an error is found with your work. If you still get paid while you are redoing this work then you are not financially liable, the mistakes made carry no financial risk for you and you are not out of pocket. This is just the same for an employee, an employee is paid for their time and it doesn’t matter how well or hard they work, they are still paid the same at the end of the week. If you take on no risk for your reward, then you are most likely to be going towards the IR35 rules.
Q.) Were you ever a permanent employee of your end client?
A.) Quitting your job with your employer and then going straight back to them in the same role but in a freelance position would put you in the IR35 rules. This situation is the reason the IR35 rules were introduced. You are getting extra reward for no extra risk.
Q.) Do you have any line management responsibilities over client staff – appraisals, disciplinary, supervision etc?
A.) Unless the staff that you have line management responsibilities for are your own staff, then you are part of another company’s management structure and under their employ. If you have any supervisory role over staff, then this would count towards inclusion within the IR35 rules.
It will be your employer to decide if you are in IR35 after April 2020.
It will be your employer that will decide whether you are inside or outside the IR35 legislation from the 6th April 2020 and this will be via the IR35 Status Determination Statement. If you feel like an employee now, then you are likely to be deemed inside the IR35 Rules after the 6th April 2020. If you are deemed to be in the IR35 rules, my advice would be to consider becoming a permanent employee of the company and enjoy all the additional benefits and security that permanent employees enjoy.
What can the freelance engineer do to be outside the IR35 rules?
There must be two sides for any deal or contract to be agreed. And both sides must be happy with the deal or contract to participate. If, as part of the contract, you are deemed to be inside IR35 then you have the choice of either being in the IR35 rules or not to enter the contract. But there are ways to position yourself as a contractor outside IR35.
There are two key factors that determine the IR35 status of a contractor. These are your written terms of engagement and your working practices. Good documentation of both is the secret to working outside IR35.
Before looking at the written terms of engagement, let’s look at the working practices you should be employing to stay working outside IR35. Looking at your working practices will help determine your terms of engagement. The secret to working outside IR35 is to not work like an employee. To not look like or work like an employee you should consider implementing these guidelines into your daily or weekly working life. Remember that arguing your IR35 status with the end client or HMRC will need a lot of evidence on your part.
Set your Working Practices and Appearances.
Q.) What hours should I work?
A.) As you work for your company (either Limited or PSC) you should set the core hours that you do business for. This may be in line with your client or it may not be in line with your client’s core hours. This is for you to decide and set out in any documentation or contracts that you enter into. Remember though, that you do need to keep your client happy, and that might mean agreeing or working different times to suit. But try and stick to your core hours. Keep a time sheet or diary of hours worked on a project.
Q.) Where should I work from?
A.) Most likely you will be required to work from your client’s offices. But if you can work from your own offices (or home) then do so whenever you can. If you have set up an office in your home make sure you can work efficiently from it and record your working time there on timesheets or a diary.
Q.) How do I take time off?
A.) You can take time off whenever you like. However, be courteous and give plenty of notice to your client. Do not engage in their systems or processes for requesting holidays or absences. You may even decide to substitute your position with another person for your time off. But you would need to ensure suitability and ensure the client is happy for a replacement during this period. If you have been off ill, do not follow any of your client’s processes for sickness leave, just evidence it an email or letter.
Q.) Something has gone wrong at the client’s place of work and I can’t work temporarily. A.) Use your time efficiently and don’t let their misfortune impact on your work or performance. If your client has a power failure at their place of work could you
continue to perform your tasks when an employee couldn’t. Being able to continue to perform your tasks (whilst your client’s employees couldn’t) demonstrates freedom to undertake your work. If you can’t work at their place of work due to health and safety concerns, demonstrate your independence by working from your own office (or home). Remember that an employee would have to stay at their place of work and undertake other tasks that they may be able to undertake.
Q.) Do I have to work exclusively for one client?
A.) No. It is better to work for multiple client’s, preferably during the same period. Working for more than one client is a good demonstration that you are in business by your own right. Working for more than one client will also help spread your financial risk especially if one client goes bankrupt or terminates your contract.
Q.) I have been offered training by my client, should I take it?
A.) You should not take part in any training offered by an end client. You should be responsible for your own training as you should know which training you should do for the best. If you are taking part in any training then it shows that you are not fit for undertaking the work you have been contracted for.
Q.) I have been asked to take part in an appraisal for my client.
A.) You should not partake in any appraisal process organised by the end client involving either you or their staff. You can however, and should, ask for your client to appraise your work at the end of the contract. This should be something you have written and be specific on the tasks that you carry out. Think of this as a review that anybody can leave about the service they have received. It will also act as a good reference for future contracts and is a good demonstration of being in business.
Q.) I need some equipment for carrying out my contracted role.
A.) You should supply all the equipment that you need to carry out the role you have been contracted for. This will include your own computer and any software needed to carry out your role. If expensive software is required (like AutoCAD) then this should be included in your rate. You should also provide any specialist equipment you might need in carrying out your contracted role. Providing equipment is one of the key components of staying outside of the IR35 rules (as employees will have all the necessary equipment provided for them). If part way through the contract the end client requires different equipment for you to complete additional works then this would require a new rate and would be excellent evidence for you working outside of the IR35 rules.
Q.) I have made a mistake, what do I do?
A.) If you were an employee, the cost of remedying the mistake would be borne by the employer. As you have made the mistake, the cost of the mistake should be borne by your (you) company. But you need to be aware that you may also be liable for further costs due to impacts to other parties due to your mistake.
Q.) What insurances do I need?
A.) As a limited company, legally if your company has two or more employees it will need to have Public Liability and Employers Liability Insurance in place. Further insurance would be to your discretion. However, your contract may stipulate other insurance requirements. Having company insurance in place will not only protect your (you) company it also shows that the company is a fully fledged business. Depending on the work you are carrying out you should consider Professional Indemnity Insurance.
The aim of the above information is for you to be able to satisfy the end client or the HMRC that your (you) business is a bona fide business, taking care of its own affairs and paying it’s fair due of tax on the profits it makes. You will have gone to the expense of setting up either a limited company or PSC so now you need to establish your company in its own right. This is a different aspect to the information above which was to do with the way you should conduct yourself during your contracted role. The following information should be considered for your limited or personal services company’s point of view.
Nurture and look after your limited or personal services company.
At this point, I would recommend that you should be going towards the limited company route, my experience is via limited companies as these are companies in their own legal right.
Make sure you promote your company’s name and specialties.
Your company is who your client is going to trade with. So, it makes sense for your company to establish itself (and its brand) as best as it can. You also want potential clients to find your company and to ultimately engage with it. This is the difference between using a company as a vehicle for your work and building a company to serve your clients.
It is important also to make sure that everyone you meet during your working day knows which company you work for. It is very important that you establish yourself and your company as independent from your client. You can do this in several ways.
1.) Have a company uniform. This can be whatever you want it to be, but it should have your company name and logo on as a minimum. You will also need to wear it whenever you are working. Make sure it is smart and fit for purpose.
2.) Have a company website along with proper email addresses. Establishing a website and having email addresses attached to it is a great way of marketing your business. It doesn’t have to be a fancy website or cost a lot of money. When sending emails make sure you have your contact details on it, as well as your company name, website address and any other pertinent contact details.
3.) Have your own Business Cards. If you are still handing out business cards make sure you have your company contact details on and nobody else’s. If you are required to have your clients company name on, try using the phrase “Working with …”
Manage how you engage with prospective clients and then how to work with clients.
1.) Define your specialities. Make sure you present to your prospective clients what you can do for them. You also need to be firm in what you can’t do for them. As you gain more and more experience you can add or take away certain aspects of the services that you provide.
2.) Have you own Terms and conditions of Business. This will seem daunting at first, but you will be able to adapt most commonly found terms and conditions of doing business to your needs. You would be well served though by seeking professional advice on this.
3.) Handling the Interview or Tendering for a role. Tendering for a contract is how you should approach potential clients (tendering is different to having an interview). Your client may think of it as an interview, but you should think of it more as a business meeting or a free consultation. This should be documented. This should be stipulated on your website as something you offer. Keeping records of consultations or meetings with potential clients is a good demonstration of being in business. Remember that you will not get every contract that you go for and evidence of unsuccessful meetings is also good evidence.
4.) You have successfully won the contract, what now? You need to ensure that your contract is at least a contract for services and should clearly state what you have been engaged to do. It should ideally be something that a regular employee doesn’t do. It should also be specific in the site that you will be undertaking the contract at. Your contract should reflect what you actually happens in practice.
5.) What else should the contract contain? Your contract should also have a duration or an estimated completion date on it. When approaching the completion date you need to carefully enter into a new contract for new period, this should not be a rolling contract as this would look like a normal employee. You should also execute your right to terminate the contract early, if you need or want to, with one week’s notice (this is something an employee can’t do). Make sure you also have a substitution clause in your contract (this may never have to be implanted).
6.) I have been offered extra work, what should I do? Lucky you, a sign that you have been satisfying the client. But don’t just accept it and get paid through your current contract. This should be treated as a separate contract and potentially a different rate. You should start the whole contract process again, and document everything. Think, one job, one contract.
The aim of the above information is for you to be able to satisfy the end client or the HMRC that your (you) business is a bona fide business, taking care of its own affairs and paying its fair due of tax on the profits it makes. Remember, that the IR35 rules are there to collect the fair and proportionate tax from people that have the same rights and privileges as full-time employees.
If you are in business offering a service that a usual employee can’t, then you should be outside of the IR35 rules.
If you feel like an employee in a contract role then you should be inside of the IR35 rules.