ir35 for small businesses

What to consider: IR35 for small business.

Victoria Scally Business Growth, Freelancers

A lot of things are changing in April** for freelancers. There are some changes to the way the IR35 rules are being applied for freelancers working with medium or large clients.

**UPDATE: The government has now announced they are delaying these changes officially to April 2021. For many freelancers this is already too late.**

Firstly, let’s remind ourselves of what IR35 is:

IR35 – the background

IR35 is designed to charge income tax and national insurance on income that would be treated as employment earnings. The way around this is the legal structure in place (usually a limited company).

These rules have been around for years. They are no longer really fit for purpose as modern working practices have changed. 

You may have seen increased coverage of the issue. In April, if a freelancer (sometimes referred to as ‘contractor’) is working for a medium or large client, there are some massive changes being brought in that only work out worse for them. 

How the rules have worked so far is that the freelancer self assessed their own IR35 status.

In short, if they do not believe the working conditions are that of basically employment, everything carries on as normal. 

They get paid and sort out their own tax. Easy.

The Public Sector

This changed a few years ago if they were working for a public sector client (such as the NHS). 

The client then got to determine if the freelancer was under IR35 (basically an employee without the benefits). 

They also carried the risk if they got this wrong. 

Unsurprisingly, most organisations then found all of their contractors inside IR35. 

This caused a massive issue as basically it was impossible for freelancers to continue to work through their limited companies with those clients.

The Private Sector

In April 2020 (**now delayed to April 2021**), the same is now happening for freelancers working in the private sector for medium or large companies. 

Just as with the public sector, what has happened is the large organisations have generally applied a blanket ruling that freelancers will be inside IR35, effectively forcing them to go on the payroll via an agency or umbrella company. 

So, what does this mean for me?

 

The good news for you is as a small business owner, the rules for you haven’t changed. IR35 for small businesses means that it’s still up to the freelancer to determine their status and they hold the risk

Our advice would be to not make this difficult by trying to apply any control, or employment type practises when they are working for you, as IR35 for small business might suddenly be applicable.

A good example would be a freelance IT person. You have a problem with a computer, call them, they tell you when they can arrive inside your office hours, but turn up and get on with it. There will be many other indicators I won’t go into here, but they will generally easily be shown to be business in their own right and won’t be under IR35. 

What if I want to formalise the way I work with them?

If you decided to have them:

  • Work with you a set day a week
  • Wear your uniform
  • Request time off
  • Invited them to the staff do
    and
  • Told them how to go about their day job and what to work on

You are likely to find yourself in a situation where you would need to apply the IR35 rules.

If you needed to do this; that’s another video entirely!

How can I check?

There is a HM Revenue & customs tool, known as a CEST, that can be used to help determine the status of IR35 for your small business.

It’s far from foolproof, but it will give you some indication of what HMRC would think if they looked into it, based on the circumstances you provided. 

In Summary

So in short, if you are a small business engaging a freelancer, providing your way of working with them doesn’t amount to that of an employment relationship, it’s business as usual.

So in the majority of cases, you needn’t worry about IR35 for your small business. We also have a blog on the benefits of working with freelancers that may be worth a read!