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IR35
for Freelancers

© 2019 YunoJuno Limited

 Hello.
Thank you for downloading this eBook on the upcoming changes to
IR35, which will affect how organisations assess whether a freelancer
is treated as an employee for tax purposes, and will affect how some
freelancers are paid with their tax calculated and collected
at source.

We’ve created this as a resource to help both freelancers and

organisations navigate these changes in a growing freelance economy.

By way of short introduction, YunoJuno is the largest creative and tech

freelancer platform in the UK. We help over 18,000 of the UK’s top creative
and tech freelance talent connect with the country’s most innovative
organisations (be that in marketing, technology, brands or startups).
We are founded on the simple principle of making a connection between
independent professionals and clients more direct and transparent and
our mission is to "unlock the true potential of freelance". We believe the
future of work is freelance and this future offers a new level of freedom
and job satisfaction for individuals as well as incredible opportunities
of efficiency, scalability and control to organisations.

Our service is backed by HSBC to ensure invoice management and

payment protection for both freelancer and client, and since founding in
2012, YunoJuno has managed a quarter-of-a-billion pounds in freelancer
transactions.

If you would like to know more about YunoJuno and the upcoming IR35
changes, or become a member of the most sought after talent pool in
the country, head over to YunoJuno.com.

Let’s drive the future of work together.

Shib Mathew
CEO & Co-Founder, YunoJuno

2 | IR35 for Freelancers

 Contents
Overview................................................................04
What is IR35
A little bit of history
What’s an intermediary?
What makes someone a ‘disguised employee’?
How does IR35 affect you right now?

What changes are coming..............................07

What do these changes mean for freelancers?
Inside IR35
Outside IR35
You can be inside IR35 and outside IR35 at different times
Are there any exemptions?
What’s involved in assessing a contract

Preparing for changes.....................................09

How is HMRC helping contractors with IR35?
What to think about now

Risks for non-compliance..............................13

Glossary of key terms.......................................14

3 | IR35 for Freelancers

 Overview
What is IR35?
IR35 is tax legislation to make sure that the right amount of tax is
paid for ‘disguised employees’.

You may have come across IR35 before, particularly if you’ve worked
in the public sector. But the rules relating to IR35 are changing for
freelancers and the companies that engage their services in the
private sector.

IR35 is tax legislation that has been around since 2000. The problem
the Government said it was originally designed to fix was described it
in the Budget press release at the time:

"There has for some time been general concern about the hiring
of individuals through their own service companies so that
they can exploit the fiscal advantages offered by a corporate
structure. It is possible for someone to leave work as an
employee on a Friday, only to return the following Monday to
do exactly the same job as an indirectly engaged ‘consultant’
paying substantially reduced tax and national insurance.

The aim of the proposed changes is to ensure that people

working in what is, in effect, disguised employment will, in
practice, pay the same tax and national insurance as someone
employed directly."

The rules have been referred to as ‘IR35’ ever since, because that was the
number of that original press release. The new rules which are coming
into force in April 2020 are different to the original rules and technically
called the ‘off payroll rules’. So you might hear that term around too.
But whatever the label, you need to know about them now.

4 | IR35 for Freelancers

 A little bit of history
To understand what’s changing, you’ll need a little bit of history. IR35
was designed to stop an individual doing employee-like work, as a
service via their ‘intermediary’, as a way of reducing income tax and
employer and employee National Insurance Contributions (NICs).

The rules say that individuals doing employee-like work via

intermediaries are not genuinely self-employed and are ‘disguised
employees’. HMRC see this as tax avoidance. This is because of how
income tax and NICs are calculated and paid: an individual using an
intermediary can pay less than if they were an employee. For example,
a director of a limited company can pay themselves a low salary and
take out the rest of the profits via dividends.

What’s an intermediary?
Intermediaries covered by IR35 include the classic ‘personal services
company’, where services are provided by the individual via a limited
company in which they have a material interest. That is by far the
most common form of intermediary. But other intermediary structures
may also be caught by the IR35 legislation, including providing
services via another individual, or providing via either a partnership or
unincorporated association in which the individual is a member with
certain rights. In HMRC-speak all of these are a ‘PSC’, so that’s the tag
we’ll use too.

What makes someone a ‘disguised employee’?

In a nutshell, someone’s a disguised employee if they provide
services to their clients via a PSC and both of these criteria are met:

1.
The individual personally performs, or is under

an obligation personally to perform, services for

the client.

2.
If there were a direct contract, the individual would
be regarded for tax purposes as an employee of the client
(or the client’s made them an office holder).

Whether or not someone is regarded as an employee

for tax purposes is complicated and can be a bit of a
headache to answer.

5 | IR35 for Freelancers

 How does IR35 affect you right now?
Guess what? It already does, but it’s getting more complicated. The
original rules put an obligation on your PSC to determine whether you are
ever a ‘disguised employee’. This is why sometimes you might find your
accountant asking you about this at the end of the year: you effectively
have an obligation to look at each contract carried out by the you, then
via your tax return report and pay additional income tax and NICs due
for those contracts where you have been a ‘disguised employee’.

And therefore the risk of getting it wrong also sits with you: HMRC
will come after the PSC to claw back income tax and NICs owed (or,
ultimately, to the individual as a director/employee of the PSC if the
PSC’s coffers are found empty).

For more information on how the IR35 rules stand today, click here.

Some of you might have some experience in the public sector since
2017, where the responsibility for determining the status switched
from the PSC to the public sector client and if you were a ‘disguised
employee’ the public sector client had an obligation to deduct income
tax and NICs at source.

For information on how the IR35 rules in the public sector stand today,
click here.

To try and make this easier for you HMRC have had an online tool called
CEST which can help determine if the individual has been a ‘disguised
employee’, but it’s not a perfect solution. There are other ways you
can get help to determine your IR35 status under the current rules.
For example via your accountant, if they provide that service, or via
specialist companies who do IR35 status reviews.

Making sure the right IR35 status is applied for each time an
individual delivers services through a PSC is critical: what is really
being asked is for this work, on these terms, done in this particular
way, is this individual really a disguised employee or not?

Right now, HMRC say the rules are not working, because not enough
contractors are admitting to being ‘disguised employees’ in the private
sector. HMRC says the cost of non-compliance in the private sector
is increasing and is projected to reach £1.3bn in 2023-24. So HMRC
are shaking things up and that’s why you need to pay attention. The
rules which you may have experience of in the public sector are being
enhanced and rolled out in the private sector.

6 | IR35 for Freelancers

 What changes
are coming?
From April 2020 the legal responsibility for determining whether or not
a contractor performing services is a ‘disguised employee’ (their ‘IR35
status’) will transfer from the PSC to the client engaging the contractor.
These rules have been in operation in the public sector since 2017, and
now they are being rolled out to the private sector. So, all clients who use
contractors will have a primary legal obligation to assess the contract in
advance and determine the IR35 status of the contract. With that comes
significant tax compliance risk for clients.

What do these changes mean for freelancers?

For every single engagement you have with a client your client will need to
assess the services you are being asked to provide, the working practices
in their business, the terms between you, and taking all that into account,
determine if the contract is ‘Inside IR35’ or ‘Outside IR35’.

Inside IR35
(i.e. you will be an ‘employee for tax purposes’)
This means that the client will need to pay your invoice differently:
the client will have a legal obligation to deduct income tax and
pay NICs and (if applicable to the client) Apprenticeship Levy. So,
the client will end up paying your PSC a reduced amount of your
charges, because of those deductions.

The client will then pay the

deductions to HMRC via payroll, like
they would for an employee. The client
still pays the PSC the full amount of
VAT and the PSC remains responsible
for accounting to HMRC for the VAT.
Being an employee for tax is not
the same as being an employee for
employment law purposes – so it
does not give you rights to things like
holiday pay, sick pay or pension.

Outside IR35
(i.e. you are ‘genuinely self-employed’
and not a ‘disguised employee’)

This means that the client will pay your

PSC’s full invoice, plus VAT if chargeable,
in the same way as any other supplier.

7 | IR35 for Freelancers

 You can be inside IR35 and outside IR35 at different times
You may find, depending on the contracts that you accept, you end up
working sometimes inside IR35 for certain contracts and sometimes
outside for other contracts inside a single year. IR35 status is
determined on a contract-by-contract basis, rather than being an
assigned status for a particular tax year or discipline. All that matters is
that you pay the right tax for the specific contract that you’re working on.

Are there any exemptions?

If the client is a small business the client may be exempt from the new
IR35 rules. The definition of small business for IR35 exemptions is likely
to be based on the definition in the Companies Act, which is met if a
company meets any two of the three triggers below:

1.
Annual turnover – Not more than £10.2 million

2.

Balance sheet total – Not more than £5.1 million

3. Number of employees – Not more than 50

What’s involved in assessing a contract

When doing an assessment, clients will need to consider a lot of different
aspects of the contract – it’s a little bit about contract terms, but a lot
about on the ground working practices. All these sorts of things need
considering (according to HMRC’s manual):

"Control, personal service, equipment, financial risk, basis

of payment, mutuality of obligation, holiday pay, sick pay
and pension rights, part and parcel of the organisation, right
to terminate a contract, opportunity to profit from sound
management, personal factors, length of engagement,
intention of the parties."

HMRC also quote one of the famous cases about how to work out
the employment status of someone:

"It must be emphasised that status in not a matter to be

determined by running down some form of check list or adding
up the number of factors pointing toward employment and
comparing that result with the number pointing toward self
employment. It is a matter of evaluating the overall picture
that emerges from a detailed review of all the facts."

As you can imagine, this will be a difficult process to get right. But
clients have a legal obligation to take ‘reasonable care’ when making
that assessment, because if they don’t, they may actually increase
their own tax risk.

One of the most important things during the assessment process is an

open and honest dialogue between clients and contractors, to ensure
that each side understands exactly how the assessment was made and
that it factually represents the on the ground working practices.

8 | IR35 for Freelancers

 Preparing for
changes
It may seem like it’s the clients who have to do all the preparing, to
be able to carry out IR35 assessments and then deduct income tax
and NICs for those contracts which are assessed as inside IR35. But,
the impact of these changes will affect all contractors.

For example, for each contract that you do, you will need to go through
whatever administrative processes the client has implemented to
carry out the assessment – some clients may only assess the contract,
but others may be more collaborative and involve you responding to
questions too.

For contracts you do for small clients, you will remain responsible for
carrying out the assessment in the same way as the rules work now.

So, you will end up with a mix of assessments, and (depending on

your clients and how they engage you) a mix of inside and outside
IR35 contracts.

The details of the changes are not finalised yet and the Government has
just finished a consultation - if you want to read it, you can see it here.
We won’t get the granular ‘black letter law’ as part of the Finance Bill
until some time in the summer, but the experiences of the public sector
and the responses to the consultation mean that what’s rolled out in the
private sector won’t be an exact match for what the public sector have
experienced. For example, there are likely to be new rules on information
flow and mechanisms to encourage better conversations between
clients and contractors if there is a disagreement about what the
correct IR35 status should be.

9 | IR35 for Freelancers

 How is HMRC helping with IR35 assessments?
HMRC have built a tool named CEST to help clients make their
assessment using reasonable care. (It’s also a tool that can continue
being used by contractors where they remain responsible for the
assessment.) If you haven’t been using the CEST tool already, we would
recommend familiarising yourself with this tool now.

However, there are questions about its effectiveness, mainly due to

the fact that some of the items that must be considered during the
assessment process (mutuality of obligation between a client and the
contractor, for example) are missing from the tool. HMRC recognise that
the tool needs to be improved and are working on it.

It is also possible to use the CEST tool and not get a definitive in or out of
IR35 answer. The third scenario is that more information is needed and
you need to ring HMRC. This may not a practical method for you, and you
may feel it’s quicker to take advice from your accountant or specialise
IR35 assessment service.

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 What to think
about now
When the similar changes were first rolled out in the public sector we
saw users of contractors pay A LOT more attention to the requirements
of IR35 and we fully expect this will happen in the private sector too. It
means that the process of agreeing assignments with your clients will
change - the client will need to do a full IR35 assessment as part of the
brief process. Depending on the assessment outcome, how you are paid
will change.

To get yourself prepared for the upcoming changes here are a few
things you can do:

Understand how the rules work

Start off by taking the HMRC IR35 test, which will
assess your current work practices to see if your
current contracts would land inside or outside IR35.
Become familiar with how it works and the sorts
of questions it asks. There is also a lot of guidance
provided by HMRC which will help you making your
own assessments when you need to (for example,
for a small client).

Understand how you deliver your services

to clients right now
To stay outside of IR35 (if that’s your priority) you
need to be sure you are operating like a ‘business’,
not a ‘disguised employee’. Do sell your services on
a time or project basis? Do you deliver your services
on-site, off-site or a mix of both? Do you have multiple
projects on the go at once or are you dedicated to one
client at a time? How embedded are you in a client
team or are you fairly independent in the way you
work (times, equipment, etc).

Understand what it is that the client is

buying when they engage you
Does the client engage a certain skillset, or are they
engaging a specific person (and only that person
will do!) One key factor in operating like a business
is whether you can send someone else in as a
substitute for you to complete the services.

11 | IR35 for Freelancers

 Understand who your clients are
When we surveyed over five hundred freelancers on
YunoJuno we found that the vast majority of you went
freelance for the freedom to work on different clients
and projects. So, understand who your clients are and
consider how much variety there is there.

Understand what you look like to the

outside world
Do you have your own brand, marketing materials,
website/portfolio/GitHub, etc? Do you look like an
independent contractor?

Understand what your contracts say

What terms are they between you and your clients? Do
you look like an independent service provider or more
like a temp?

12 | IR35 for Freelancers

 What are the risks
for non-compliance
To a large extent, there have always been IR35 risks for you and your PSC.
From April 2020 some of these risks will remain with you, and some will
transfer to clients.

However, if you misclassify yourself, or are complicit in a client doing so,

there is a risk that HMRC will launch an investigation. This can result in
back taxes due, penalty fees and interest charges, alongside the time
costs and legal fees for you and/or the client.

Beyond this, if it is discovered that you helping clients deem contracts

outside IR35 without them taking reasonable care (for example, on
purpose to avoid payments), then you could be accused of facilitating
tax avoidance, which is punishable under the Criminal Finances Act!

13 | IR35 for Freelancers

 Glossary of
key terms:
By now you’ve probably realised that the world of IR35 is full of jargon
and TLA’s (Three Letter Acronyms) which is why we’ve put together a
useful guide to what some of these words actually mean:

April 2020:
From April 2020 IR35 will be applied to everyone in the same way as
it is currently applied in the public sector. This means that the legal
responsibility for determining the status of each contract falls to
the end-user of the freelance contractor, not their PSC or any other
intermediary, and with that comes significant tax compliance risk.

When these changes were first rolled out in the public sector we
saw users of freelance contractors pay A LOT more attention to the
requirements of IR35 and we think this will happen in the private
sector too.

C EST:
This stands for Check Employee Status for Tax and is a government tool
to, in their words: find out if you, or a worker on a specific engagement,
should be classed as employed or self-employed for tax purposes.
Basically to see if a contractor is in or out of IR35.

Contract for services and contract of service:

Similar to the MOO these are key tests of if a contract falls inside IR35. If a
contractor has ‘contract of service’ it generally means they’re an employee:
they have to work set hours at a set location or have a line manager and
the client / employer can ask the contractor to perform any reasonable
duties. On the other hand a ‘contract for services’ (yup, a whole 3 letters
different) is one where a genuinely self-employed person provides specific
services, for example to a particular project or set of deliverables. A
contract for services doesn’t define where or when a contractor works in
the same way as (say) an employment contract, only what the contractor
is expected to provide and by when.

Disguised employment / disguised employee:

This is what HMRC are looking to stop: a disguised employee is a
contractor who effectively does an employee-type job but doesn’t pay
the same income tax or National Insurance contributions (NIC) that an
employee would. (An employee-type job doesn’t have to be permanent
and can be part time or fixed term, like maternity cover.)

14 | IR35 for Freelancers

 Employment language:
This language can be seen as an indicator of a contract being inside
IR35. Employment language means terms like line manage, hours of
work etc. Basically if it looks like something that would be more at home
in an employee / employer contract than a business to business contract
then it’s probably employment language and would point towards the
contract being inside IR35.

Exclusive service:
Basically, if a contractor doesn’t have the right to take on another
concurrent client then they are seen as being in exclusive service and
this may point towards being inside IR35.

Inside IR35:
If a contract is assessed as inside IR35 the contractor is treated, for tax
only, like an employee of the end user and so needs to be taxed like a
PAYE employee. (It does not mean the contractor is an employee of the
end user from an employment rights perspective.)

Intermediaries legislation:
This is simply another name for the IR35 legislation.

Intention of parties:
This is just another way of talking about the contract for service and
contract of services thing we mention above. But it goes deeper than
the paperwork looks at the underlying intentions of the client and the
contractor.

IR35:
Well IR35 literally stands for Inland Revenue 35 - which is the reference
number of the press release given by the Inland Revenue (now HMRC) to
announce the intermediaries legislation. It’s also known now as the off-
payroll legislation.

The legislation itself is designed to stop workers claiming to be self-

employed contractors via an intermediary like their limited company
for tax benefits when really they’re an employee.

MOO:
Not just the noise made by a friendly cow, it stands for ‘mutuality of
obligation’. This is one of the key tests to see if a freelance contractor
falls inside IR35. In short it’s the obligation of an employer to provide
work for the employee to do, for the employee to do it and the employer to
pay for it. If there’s MOO, the contract is almost certainly inside IR35.

15 | IR35 for Freelancers

 Outside IR35:
If a contract is assessed as outside IR35 it means that the government
sees the contractor as operating like a business, not like an employee, so
the contractor’s PSC doesn’t need to be taxed like a PAYE employee.

Part and parcel:

This is similar to provision of equipment, but it’s a bit more vague.
Essentially if the client sees the contractor as part of the team and
gives them access to other benefits a regular employee would get,
like an unrestricted building pass for example, the contractor may be
considered part and parcel.

Provision of equipment:
Basically, this is asking who is providing all the equipment to be used,
like a laptop, email account, etc. If these are being provided by the end
client then the contract is likely to be considered inside IR35. But don’t
panic, specialist kit is excluded, it’s more the day-to-day stuff.

PSC:
A PSC is a Personal Service Company which is normally a contractor’s
limited company. But on rare occasions a person could use other
forms of intermediary like another individual, or a partnership or
unincorporated association. Basically most things where the contractor
is ‘wrapped’ in another structure which they have influence over in
some way.

Supervision, direction or control:

This is a little bit vague: HMRC say that if the contractor appears to be
under the supervision, direction or control of the end client then the
contractor should be assessed as inside IR35; there is a bit of a grey area
around what that means in practice and legally each word has a slightly
different meaning (and there have been plenty of court cases arguing
about it!).

Substitution
A genuinely self-employed contractor should (in theory) be able to send a
substitute contractor in their place to perform the work. A genuine right
of substitution (and evidence of it having been exercised previously)
would point towards the contract being outside of IR35.

Working practices:
This is another name for the day-to-day relationship between you and
your contractors and will be a key ingredient in any IR35 assessment.

16 | IR35 for Freelancers

 Thank you
If you have more questions please
get in touch at hello@yunojuno.com

The information provided on this eBook is of a general nature. It

is not a substitute for specific tax advice about your own specific
circumstances. We recommend you get professional advice about your
own specific tax obligations.