Outside IR35: word your contract to stop the off-payroll rules from applying

It’s fair to say that the vast majority of limited company freelancers would prefer to work on projects that are deemed outside the clutches of the IR35 legislation, writes Seb Maley, chief executive of Qdos.

But what does working outside IR35 mean in layman's terms? And how can creative industries freelancers position themselves to ensure that they are seen by clients as legitimately self-employed, not disguised employees?

Outside IR35 vs Inside IR35

Freelancers operating outside IR35 are regarded as providing service to their clients as a true business, rather than as an employee. In other words, you’re considered to be genuinely self-employed and will pay tax as a self-employed worker, not as an employee.

In contrast, working inside IR35 means the working relationship with your client reflects employment. As a result, you’ll be taxed under PAYE for any earnings on that particular project. Should you be interested, my guide for FreelanceUK on what it means to work inside IR35 is here.

Paid gross if you’re not caught by IR35

Back to working outside IR35. Your earnings for that contract will be paid in gross without any tax deductions having been made by your client or whichever party is responsible for paying you.

But a big question, following the introduction of IR35 reform in both the public and private sectors, in 2017 and 2021 respectively, is how can freelancers safeguard their outside IR35 status? After all, due to IR35 reform, medium and large businesses (along with public sector bodies) are now responsible for deciding if an incorporated freelancer belongs inside or outside IR35.

The good news is that there are ways to protect your outside IR35 status and also challenge incorrect or unfair IR35 status determinations made by your client – something which freelancers are experiencing all too often since the rollout of reform.

Three key IR35 status tests

First, when it comes to IR35, the contract is king – certainly in assessing IR35 status before a project starts. There are three so-called ‘key IR35 status tests,’ which are:

1. Control

Freelancers working outside IR35 shouldn’t work under the direct control of their client. By this, I mean you should enjoy a level of autonomy regarding how you provide your services and freedom to choose when you work and where from – assuming your type of work allows for this of course.

2. Mutuality of Obligation

There shouldn’t be a mutual obligation for the client to offer paid work and for you to accept it. Saying ‘no’ to work that falls outside the scope of the contract, along with including start and end dates, are important things to make sure you try to do.

3. Personal Service

Do you provide your services as ‘John Smith’ the person, or as ‘John Smith Ltd’ the business?

On outside IR35 contracts, you should deliver the work as a business, not a person. One way to show this is to ensure the right of substitution is not only included in the contract but also exercised.

Being ‘in Business On Your Account’

Alongside this, to be considered outside IR35, it’s important that you’re able to demonstrate that you operate a ‘proper’ business – whether that’s through having multiple clients, shouldering financial risk (e.g. rectifying mistakes you make at your own cost), and even having your own website.

Assuming you include some – or even all – of these clauses in your contract, it should start to paint the picture of a contract for service (outside IR35), rather than a contract of services (inside IR35).

Not just a case of what it says in the contract, as working practices matter massively

However, I should make clear that whatever is agreed in the contract must be reflected in reality, when you actually deliver the services. HMRC will look closely at your working practices in the event of an IR35 investigation.

The reality is, after IR35 reform, some businesses will naturally take a risk-averse approach to IR35 and class your contract inside IR35 automatically, for fear of falling foul of the Intermediaries legislation (IR35).

Finally, consider speaking to an IR35 expert

Should this happen, seeking independent and objective advice could prove key in strengthening your position as a genuinely self-employed worker, who can be engaged compliantly outside IR35.