The regulations state that if your work falls under IR35, then 95% of the fees you earn (less certain allowable expenses, which include pension premiums) have to be paid as salary to you, the person who has carried out the work. The remaining 5% may be used by the company to cover expenses. However, this 5% allowance has now been removed for individuals working in the public sector under IR35.
IR35 legislation requires evidence to be considered covering several factors, with the actual working practices being more important than the contractual agreement. Considerations include, but are not limited to:
- Control – to what extent the freelance worker is told how to undertake the work;
- Substitution – whether the freelance worker (or umbrella company) can send someone else to deliver the same outcome;
- Mutuality of obligation – for the end-client to provide work and for the freelance worker to complete it;
- Financial risk – whether the freelance worker (or umbrella company) are in business in their own account;
- Part and parcel of the hiring firm – the extent to which the freelance worker is treated as an employee of the end client.
As a general rule, if your assignment is project-based or is consultancy work, you might expect your contract to fall outside IR35.
As a general rule, if your assignment is time-based and you are doing the sort of work for your end-client that would normally be done by an employee of your end-client, then you might expect your assignment to fall under IR35. So if you are working on maternity cover, or replacing a manager or director who is otherwise absent, your assignment will normally come under IR35.
You must make a decision for every assignment as to whether it falls within IR35 or not, and apply the legislation accordingly.
However, the rules have changed for those working in the public sector (see below).
New IR35 legislation affecting interims working in the public sector
The easiest option in this case will be to work through a payroll umbrella company.
This is explained in more detail in the guide Contracting in the Public Sector: Limited or Umbrella?
Deciding your IR35 status
The new HMRC ESS tool is available to test your IR35 status and, if you are relying on this, you should keep a copy of the result and be able to demonstrate that you have answered the questions truthfully if challenged by HMRC. Alternatively, there may be occasions when it is appropriate to request a legal review of your contract and working practices.
Be aware that many end-clients may be reluctant to state that they have no right of supervision, direction or control over the freelance workers that they employ, or that they relinquish any right that they could have. Therefore, most freelance workers in the public sector, whether working through a payroll umbrella company or through a personal service company, will be told that they are working under IR35 and will not be able to claim tax relief on travel expenses to and from work while on these assignments.
Please be aware that if we are found to be reclaiming expenses incorrectly on your behalf whilst you are working on assignment under IR35, then HRMC advise that the expenses will be reclassified as income, and tax and NI will be due on the income. Furthermore, they could at the same time instigate an unwelcome investigation. It is therefore extremely important that every contract is reviewed to assess whether the IR35 rules apply.