IR35 – what’s it all about? Well, I recently almost missed out on pitching to a leading insurance company for a significant freelance copywriting project. Why? (Whizz down to the end if you just want to find out what happened.)
With IR35 rules coming into force for the private sector from 6 April 2020, it’s not surprising that major medium- and large-sized companies are treading cautiously. They’re now responsible for determining the IR35 status of any copywriters they engage. Their headache lies in deciding if we count as permanent employees (inside IR35) or as off-payroll workers (outside IR35).
Although IR35 only applies to incorporated (limited) businesses, the rules for a sole trader like me are sneakily similar. Be warned!
What is IR35?
IR35 was set up the HMRC to cut down on freelancers avoiding tax by working as ‘disguised employees’ i.e. people who work in a similar way to full-time employees but invoice through their limited companies – and pay less tax. They can pay corporation tax at 20% on profits, claim for business costs against their tax bill, and pay themselves a lower salary yet add on dividends.
IR35 also aims to stop employers paying people this way to avoid making National Insurance contributions and providing employment benefits – and save themselves money.
How to check if you’re a ‘disguised employee’
Are you inside or outside of IR35?
Oh, the hokey cokey of it all. There’s no cut and dried HMRC guide as to whether or not a contracting copywriter comes under IR35 but there are three principles to help you check:
Mutuality of obligation: if self-employed, you work on a project-by-project basis for a client without any obligation to continue when a project is over and done, and you work for other clients at the same time.
‘Yes’ to both? You’re outside of IR35.
Substitution: could you hire another copywriter to complete the contract work on your behalf? For example, if you’re up against a deadline and need another pair of copywriting hands. If a contract states that the client wants you and only you, Queen or King Bee, to work on a project, you’re unfortunately inside of IR35.
(I’d never do that but suspect adding it in to my terms could appear flaky to a client ….)
Control: does your copywriting contract with the client state how and when you work? If you’re the boss of you and have the flexibility to dictate this, you’re outside of IR35.
Still unsure? Use HMRC’s Check Employment Status for Tax (CEST) tool to double-check your status. This handy Contractor Calculator guide leads you through that CEST tool ‘to achieve your IR35 pass ticket’.
What’s the definition of a self-employed copywriter?
According to HMRC, being self-employed means running your business for yourself and taking responsibility for its success or failure. For example, by being responsible for sorting out any copywriting amends in your own time. Or by paying for equipment yourself, such as your Mac/mobile, and running costs. By having your own website. By working for more than one client at a time. And by not receiving holiday or sick pay.
But be careful: having one client as your only source of income for several months may seem a huge cash-flow relief and send you off shopping at Waitrose not Tesco, but can look as if you’re employed by that client and could therefore fall within IR35.
So, back to what happened with my potential pitch …
My-lovely-accountant-of-many-years has always advised me against setting up a Private Limited Company. There’s more ongoing paperwork to file, Corporation Tax to pay, a set of Articles of Association to draw up, shareholdings to apportion, annual accounts to keep, blah blah blah – and higher accountancy fees to therefore pay too. It’s a lot of red tape.
As a sole trader, my tax responsibilities and VAT liabilities are easy to account for. As a limited company, the way you pay yourself for that hard-earned crust is quite different. However, as a sole trader, my liability is not limited and I’m more exposed to risk – and that was the reason for my potential client’s concerns, especially due to the sector they’re in.
So I discussed the situation with my-lovely-accountant-of-many-years who said he can easily set me up as a limited company in just three days if I win the business. Happy me. Happy client. Happy accountant being able to charge me more. Hey, it’s fine.
How to help save the flexible workforce
HMRC estimates that 170,000 workers are affected, especially IT contractors. People are concerned that private sector employers will stop using contractors. Stop The Off-Payroll Tax campaigners organised a protest at Westminster on 12th February for contractors and freelancers to lobby their MPs. The reform was due to come into effect as of April 6th but has now been delayed to April 2021 due to the Covid-19 situation.
If you’d like to make your voice known, sign up to support the campaign or email email@example.com.
Written by Caroline Gibson, freelance copywriter and sole trader (for the time being, at least). I’m not an accountant so do speak to yours for IR35 advice, but I am qualified to tell you how to keep your freelance cash flowing; check out my 11 tips.
E: firstname.lastname@example.org T: +44 (0) 7957 567766
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