The IR35 Regulations regulate off-payroll working in the private sector. The launch was temporarily suspended due to Covid but then came into force with a soft launch in April 2021.

HMRC has been fully enforcing these rules from April 2022 onward which could mean trouble for a lot of Start ups and SMEs that rely on contractors.

The implications for SMEs is that you will have to make a call as to whether your freelancer is an employee or not for tax purposes. If HMRC finds your contractor relationship to be inside IR35, you could be liable to pay:

·      income tax and National Insurance contributions on behalf of your engaged freelancer;

·      your own employer National Insurance as if that individual was an employee for the time of the engagement;

·      interest on these amounts; and

·      HMRC may also enforce penalties where companies have shown particular disregard for compliance obligations toward off-payroll working.

If you are a freelancer, it will be directly problematic as well. Firstly, it may be you that holds the burden with compliance depending on the size of the company to whom you are supplying services.

Secondly, if the client holds the burden, whilst it may be your client that will be required to pay your taxes and National Insurance contributions, this shall be deducted from your fees which could end up in you being indebted to your client down the line. In addition, you will likely lose your client! This is because:

·      You will likely become too expensive; and

·      even though you are deemed an employee for tax purposes, you are not deemed an employee legally and will not gain the rights of an employee with your client after such a finding.

So the question is, how do you deduce whether your relationship is inside or outside IR35?

One aspect of this question which is very confusing for businesses and freelancers alike is that the employee/worker status determination follows different rules to those laid down in established employment case law. Whilst there are similarities, the test is not the same.

You can take the government ‘Check the Employment Status for Tax’ questionnaire which is supposed to apply the test. However, this has become criticised for an over reliance on the ability to substitute the services of the freelancer for another individual.

Consequently, at this relatively early stage of enforcement it is very difficult to know how exactly HMRC will treat the question of employment status when it comes to the crunch. However, one way to reduce the risk of a negative finding in an investigation is to review your existing freelance relationships and revisit any contracts you have in place for those engagements.

Or, where you are currently in search of another pair of hands, you need to think about how to treat your engagements and how that can be reflected in an agreement. In some cases it may be better to employ a freelancer but we also understand that this may dent your attempts to garner the best talent. In such cases, we can help you structure your freelancing relationships in a way which is low risk by putting in place documentation and practices that can protect your business.

For more information ask one of our solicitors or send us your existing contracts for IR35 risk review or both!