What is IR35?
In 1999, the then Chancellor of the Exchequer announced in his budget a proposal to change the way in which certain freelancers were taxed. The proposals were subsequently published in a press release numbered IR35. The Intermediaries Legislation, as it came to be called, became law as Section 59 and Schedule 12 of the Finance Act 2000 and was later consolidated into Chapter 8 of the Income Tax (Earnings & Pensions) Act 2003.
What the legislation seeks to do is to separate freelancers into two categories; those that can be treated as genuine freelancers and those that are, in the words of Government, “in disguised employment”. HMRC has introduced an employment status test to make this judgement based on the contract between the freelancer and his agency and the freelancer’s working practices. Also, the contract between the agency and the end-user will be taken into account as will the working practices as seen by the end-user.
If the freelancer is “caught by IR35” then, with a few exceptions, all income is treated as earnings and taxed accordingly. This means that the freelancer is taxed in the same way as an employee and no significant tax advantage accrues. In this circumstance, there is very little advantage that can be gained from the use of a Personal Service Company and, in most cases, the best way forward is the use of a compliant Umbrella solution.
HMRC’s determination of employment status can be challenged by the freelancer and very often is; sometimes successfully and sometimes not.
