What is the IR35 rule for freelancers in the UK?

The IR35 rule, already in place in the English public sector since 2017, will revolutionize the world of self-employment and freelancing starting in 2021. Here is the information to know about this standard and how it could impact freelancers and independent workers.

What is the IR35 rule? 

The IR35 legislation is a set of UK tax measures aimed at combating disguised employment in the UK. Proposed in 1999 within the United Kingdom, this legislation was passed in 2000 by the HMRC (Her Majesty’s Revenue and Customs), the branch of the British government responsible for tax collection and payment in the United Kingdom, the equivalent of taxes in France). A reform of this legislation was passed in 2017 for the public sector, and will come into force in 2021 in the private sector (initially scheduled for 2020 but postponed due to the COVID-19 pandemic). The IR35 is a British law; therefore, it only affects self-employed workers (freelancers) and companies in the United Kingdom, as well as the taxes and duties arising from their activities.

THEORY AND CONTEXT BEHIND THE NEW IR35 RULE.

The IR35 aims to identify entrepreneurs and the self-employed who are poorly classified for tax purposes. For entrepreneurs, this concerns those in the position of “disguised employees”. That is, they “disguise” their true status as an employee and therefore pay the wrong income tax.

This set of laws was created because the HRMC realized that a large number of entrepreneurs and independent workers (who can be called “self-employed,” “contractors” or “freelancers”), were declared and treated as such, when (in reality) they had assimilated functions of employees of the company (and should have been declared as such). Thus, they were not paying the correct income tax, nor the correct National Insurance Contributions (NICs), that they should have.

WHY WAS THE IR35 RULE REFORMED, STARTING APRIL 2021?

In order to understand the magnitude of this reform, it must be kept in mind that it represents one of the most significant changes, within recent decades, in the United Kingdom.

Before this body of legislation, borders were blurred and jobs were sometimes categorized differently from what they were in reality. The legislation has, therefore, evolved over time in order to adapt to realities.

At first, the government noticed that the daily rates for contractors had increased considerably. They then concluded that the British had decided, in numbers, to leave their employee status in order to become “entrepreneurs” of public limited companies. In reality they continued to perform the same roles and functions with their company under the status of contractor, with the aim to benefit from lower tax rates and tax advantages.

Clearly, these laws were mainly intended for entrepreneurs working through this status; when in actuality, these individuals should have had the status of employee for the company they worked for. This difference, therefore, implied tax relief.

According to the British government, some gray areas in this regard have resulted in abuse and a tax loss of several billion pounds each year.

Does the IR35 apply to my situation?

It’s up to freelancers and contractors to make sure they fall into the right category and pay the taxes that apply to their line of work. Here is additional information to help you understand which category you may fall into.

HOW DO YOU DETERMINE YOUR PROFILE AND STATUS: EMPLOYEE VS CONTRACTOR?

In some cases, the boundaries can be blurry and an independent contractor can ask the question: how do I situate myself in relation to the IR35 rule? Am I in good standing?

A simple way to summarize the situation is to ask yourself: am I employed by my company (with the status and benefits that go with it, with taxes and duties being withheld at the source)? Or, do I work for the client – or even an intermediary service company – with the appropriate contract (I declare my income myself and pay the appropriate taxes)?

It is therefore necessary to distinguish between an “employee” (an employee with a work contract, aka a “permanent contract”) and a “contractor” (“self-employed”). The “contractor” is an independent person who works for their client for a defined period of time and on one or more specific projects. As a general rule, these “contractors,” chosen for their skills and knowledge, have a service contract stipulating the nature of their assignment.

I AM A FREELANCER IN THE UK, AM I IMPACTED?

 Two scenarios arise for freelancers in the United Kingdom:

 To be “inside” the IR35 rule: i.e. to be considered by the HMRC as a sole employee of a company (full-time). In this case, you have more than a chance of being considered inside the rule and therefore have to move towards a PAYE (Pay As You Earn) tax model. You pay taxes in the same way a permanent employee would pay and it is your employer who takes care of everything.

To be “outside” of the IR35 rule: means to be working legitimately as an entrepreneur or freelancer in England and being paid by your client directly. In this case, you have the responsibility to make sure that you pay the correct amount of tax on the money you collect for your work. You are not subject to the PAYE payslip regime.

Do you have any doubts about your situation?

Please do not hesitate to contact us, so that we can provide you with a personalized response.

How to become a freelance in the United Kingdom and get support?

 When you’ve decided to take the plunge and start freelancing in the UK, you need to start with the mandatory legal steps. Let’s look at this in greater detail.

HOW DO YOU BECOME A FREELANCER IN THE UK? THE PROCEDURES.

The first step, when you want to work in the UK, whether fully employed or freelancing, is to obtain your National Insurance Number (NIN). The first contact is by phone: an agent will ask you a few questions (you can find the phone number directly on the official gov.co.uk website) and then provide you with an appointment date in order to obtain your NIN.

Once obtained, you will need to register with HMRC and declare your “self-employment” activity.

You will then have to provide some information: name and surname, date of birth, telephone number, postal address, start date of your work, the sector, your NIN, and finally if you are starting the work alone or with a partner. You can find the complete procedure on the official website: gov.co.uk.

 It is advisable to do this, at the latest, after you find your first customer (who may ask for your Unique Taxpayer Reference (UTR) number). The important thing to do is to have validated your registration file before the end of the first year of your work.

WHAT ARE THE AVAILABLE SUPPORTS?

In order to facilitate the procedures with their clients, the freelancer can also be accompanied by an umbrella company. You then become employed by the umbrella company, while also retaining your freedom as a self-employed person.

Through this, it is then possible to benefit from all the advantages of self-employment, but without the administrative or legal constraints! The umbrella company takes care of everything and pays you via payslips (the PAYE system); you just have to focus on your assignment. This model is especially ideal for foreigners and expatriates since the umbrella company takes care of all the local legislation and administration.

Among the umbrella companies in England, Hightekers has the advantage of partnering with many Europeans looking to work in the UK. It is a genuine network available to you, as well as provides tax security. However, these are not the only advantages: a secure environment, associate status, international opportunities, contract and invoice management, high-end services available (company car, mutual insurance company, etc.) , and so many others.

There’s no need to worry about the contractual part with the customer or even negotiate an hourly rate. It’s a savings of time and energy, as well as a genuine international freedom as a freelancer in England.