Home Insights Living the freelance dream?

Living the freelance dream?

By Dan Waring
23rd Aug 2023

If you work as a contractor and have your own company, or you are considering taking the plunge, it is vital to understand the off-payroll working (or “IR35”) rules and how they impact your tax position.

The tax treatment of freelance contractors continues to be a hot topic and there have been several high-profile cases in recent years, some involving celebrities.

What is off-payroll working?

Many freelancers choose to operate through their own limited company (a so-called personal service company or ‘PSC’) instead of working directly for clients.

There are possible Income Tax, NIC and cash flow advantages to operating in this way, rather than working for the client as an employee.  The client also stands to gain by not incurring employer NICs.

When the government introduced the IR35 rules over twenty years ago, it was amid concerns that PSCs were, in many cases, being used to disguise the fact that individuals were effectively working as employees of their clients while enjoying the tax advantages available to genuine self-employed contractors.

Am I caught by IR35 and what are the consequences?

In essence, the off-payroll working / IR35 rules are simple.  You need to ask one question: ‘If I was engaged directly by my client and my company did not exist, would I be treated as an employee?’

If the answer is ‘yes’ then you fall within the IR35 rules, which will broadly ensure that you end up paying the same amount of tax and NICs as you would as an employee.

Unfortunately, establishing whether you would be treated as an employee or self-employed can be very difficult.  A host of factors need to be considered, making this a notoriously grey area where it pays to seek expert advice.  HMRC also provide an online Check Employment Status for Tax tool, often referred to as ‘CEST’.

At worst, you could be caught by IR35, so you face the same tax liability as an employee, but with none of the legal rights of an employee – including entitlements to holiday and sick pay.

What has changed recently?

The latest rule-change in 2021 put the onus on medium and large private sector businesses to determine the IR35 status of contractors they engage with.  Many larger businesses err on the side of caution to ensure they are compliant, which can produce unfair outcomes for genuine contractors.

Under the short-lived Liz Truss government, plans were afoot to reverse the 2021 rule changes (and earlier changes aimed at the public sector) but for now it appears they are here to stay.

What are the takeaways?

Always examine your IR35 status critically and take professional advice where needed to ensure that your income is taxed correctly.  It is also essential to review the position as your circumstances change.  If you need any guidance on this topic, please do get in touch with us.

This information is given by way of general guidance only, and no action should be taken based solely on the information contained herein. No liability is accepted by Ensors Accountants LLP for any actions taken without seeking appropriate professional advice.