Blog: Attention Freelancers
Time to Adapt Your Perspective on IR35

Do you recall Friday 23rd September 2022? 

When Liz Truss was the Prime Minister and Kwasi Kwarteng was the Chancellor? 

Kwarteng made an announcement about streamlining IR35, aiming to eliminate its “needless intricacy and expenses”. Despite the widespread approval, we advised caution at the time. Essentially, the responsibility of determining IR35 status was poised to return to the contractor or freelancer. However, Jeremy Hunt had a different viewpoint and reinstated the previous regulations almost immediately. This sudden reversal disheartened the business community, and it seems the status quo will persist for some time yet.

Deciphering IR35

Before delving into its implications, let’s understand IR35’s basics.

Experienced contractors and freelancers are no strangers to IR35, having been around for over two decades.

Qdos defines IR35 as:

“Introduced in 2000, IR35 is a lens through which HMRC views workers, deeming some as ‘disguised employees’.”

Contractor Calculator puts it as:

“IR35 is a term describing two tax legislations intended to prevent tax evasion by workers and their hiring firms, who operate via intermediaries (like limited companies), but would be seen as employees if the intermediary wasn’t present.”

Decoding the Policy Reversal

In April 2021, the responsibility for defining IR35 status was shifted to the end-client and the fee payer. As per the GOV.UK site:

“From 6 April 2021, all public authorities and medium to large-sized clients outside the public sector have the duty of determining if the rules apply. For services to a small client outside the public sector, the worker’s intermediary decides the employment status and rule applicability.”

In essence, the policy flip means this remains unchanged. This is how it looks to remain until there is a change in government. That is also no guarantee of an improvement.

Ensuring IR35 Compliance as a Freelancer

With over 430,000 individuals securing freelance and contract jobs yearly in the UK, staying compliant is pivotal. Like hiring entities, freelancers should engage with providers having robust IR35 compliance processes and credible IR35 determinations.

To deduce if a contractor or freelancer qualifies as a “disguised employee”, HMRC considers several status indicators, among which are:

• Control: Evaluates the client’s influence over the work’s method, location, and timing.
• Right of Substitution: Highlights the contractor’s freedom to delegate their responsibilities.
• Mutuality of Obligations: Distinguishes between a project’s limited scope and ongoing obligations.
• Financial Risk: Considers the financial liability a contractor might bear.
• Insurance: Determines whether contractors carry their own indemnity insurance.
• Non-exclusivity: Assesses a contractor’s ability to cater to multiple clients.
• Equipment: Weighs if contractors deploy their own resources for tasks.

This would then determine if a contractor or freelancer is inside or outside IR35.

Freelancers: Shift in Work Approach is Imperative

The majority of contractors and freelancers want to work outside IR35.

Recent data has highlighted an intriguing trend among the UK’s contract and freelance community. A study conducted by IPSE (the Association of Independent Professionals and the Self-Employed) offers a glimpse into how high-skilled contractors and freelancers are reacting to the changes in IR35 regulations.

Out of 1,500 surveyed professionals, an astounding 53% disclosed that they had declined a work offer in the past year due to the role being classified as “inside IR35”. This indicates a marked increase, with the figure standing at just 31% in the prior year’s survey. Delving deeper, the future sentiment also seems to align with this trend. A significant 62% of those surveyed expressed their intention to exclusively engage in roles deemed “outside IR35” in the forthcoming year. This too has seen an uptick from 55% in the previous year’s feedback.

These statistics underline a palpable shift in mindset among independent professionals. The adjustments to IR35 seem to be influencing decisions about the type of engagements contractors are willing to undertake, emphasising the importance of regulatory awareness for both freelancers and the businesses that hire them.

However, there needs to be a change in how many contractors and freelance perceive working outside IR35. Here are some suggestions in changes that will help:

• Forsake Daily Rates: Aim for payment based on results, not hours. This is what we call in the industry outcome-based Statement of Work (SOW).
• Ditch Notice Periods: With freelancing, standard notice periods might not apply.
• Champion Milestones: Segment outcome-based projects into defined phases.
• Acknowledge Risks: Both parties, client and contractor, should recognize and embrace inherent risks. It cannot be outside IR35 without financial risk.
• Have a Virtual Bench: A small network of professionals that you can subcontract work to when needed.
• Prioritise SOW over Traditional Contracts: Engage in creating the Statement of Work (SOW) either with intermediaries or clients. If you desire to work outside IR35, insist on visibility and involvement in this process.

Conclusion

Contractors and Freelancers need to be agile, adapting to the evolving landscapes of regulatory policies and market demands. With the right perspective and strategies, navigating the IR35 can be both efficient and compliant. More and more companies are hiring via outcome-based SOW’s, be ready to embrace them.