Inside IR35: a freelancer’s guide to being caught by HMRC off-payroll rules

The introduction of IR35 reform in the private sector in April 2021 brought these complex tax rules into sharp focus for creative industries freelancers, writes Seb Maley, CEO of status advisory Qdos.

Following the changes, medium and large businesses – in addition to public sector organisations – are now responsible for determining the IR35 status of freelancers who operate via their own limited company.

What does it mean to be classed as inside IR35?

Well, in simple terms, it means the service you provide to your client is delivered in a manner akin to employment, rather than self-employment.

Put slightly differently, your contractual terms and / or working practices are more aligned with an employment relationship than self-employment.

And so, in the eyes of HMRC, you’re expected to pay tax as an employee. You become ‘employed for tax purposes’ and will be taxed income tax and National Insurance at the rate of an employee for earnings on the contract (classed as inside IR35).

Status Determination Statements

Freelancers and contractors typically learn the outcome their IR35 assessment when a client issues a Status Determination Statement (SDS), in which they will explain the factors contributing to this decision.

The sticking point, though, is that in exchange for working inside IR35 and paying tax as an employee, freelancers don’t receive any employment rights in return – an injustice which the government has confirmed they have no plans to put right any time soon.

It therefore goes without saying that operating outside IR35 tends to be the aim for the vast majority of freelancers and contractors.

But how does one achieve an outside IR35 status? And are there ways to legitimately ensure that your contract is classed outside IR35?

Outside IR35 and key status factors

Fuller guidance on outside IR35 will follow this exclusive guide for FreelanceUK on being inside IR35.

Yet as a starting point, to demonstrate to your client that your contract is clearly outside IR35, first and foremost, your contract must reflect a ‘contract for service’, not a ‘contract of service’.

To achieve this, you should focus on the three so-called ‘key IR35 status tests’ – Personal Service, Control and Mutuality of Obligation (MoO).

Generally, freelancers who belong outside IR35 must not provide a Personal Service, so that means you must make sure you hold the right of substitution.

Autonomy, mutuality and saying no to work

It’s important that you aren’t controlled by your client either. Having autonomy over how you work, when and where from is a good start to achieve ‘outside IR35.’ By contrast, not having autonomy is a strong pointer towards being inside or caught by IR35.

In addition, there should not be a mutual obligation for the client to provide paid work and for you to accept, much like an employee-employer relationship, if you want to have no truck with inside IR35.

Interestingly, saying ‘no’ to work outside the scope of your contract is one way to show that MoO is not present.

Financial Risk and Part & Parcel

There are various other factors to consider, of course. From ‘financial risk’ (i.e. your business should be responsible for rectifying mistakes in its own time and at your own expense), to making sure you aren’t ‘part and parcel’ of the client business, IR35 status should be decided upon after having taken everything into account.

This is what judges do when IR35 status reaches the courts -- they stand back and look at the big picture of the freelancer’s engagement to decide if it was self-employment (outside IR35) or an employment relationship (inside IR35).

IR35: Your contract must be reflected in your day-to-day working practices

Finally – and I can’t stress this enough to creative freelancers or freelancers working in any other sector – whatever has been agreed upon in your contract, must (must) be reflected in your working practices.

By this, I mean your contract should align with the way in which you provide your services day-in-day-out. Be aware, when scrutinising freelancers under the Intermediaries legislation (IR35), HMRC tends to focus heavily on the working practices, notably in the event of an IR35 investigation. The key is to make sure your contract reflects the reality of the arrangement -- it’s not simply what was agreed on paper that counts.

Granted, following IR35 reform, it won’t be you – the freelancer – who is held liable should HMRC find you’ve been working outside IR35 incorrectly. However, financially speaking, it’s certainly in your best interests to ensure your engagement remains outside IR35 and doesn’t stray into inside IR35.

Finally, consider asking a specialist for an IR35 contract review

So to recap, and as you’ve no doubt gathered, working inside IR35 will reduce your take-home pay and result in you paying tax as an employee, not a self-employed worker.

With this in mind, and to show your client that you belong outside IR35, a good place to start is by having your contract reviewed by an independent IR35 specialist who can advise on where you stand.