How do IR35 changes affect creative freelancers? (Q&A)
Last Updated on 31 May 2023
You may have heard that the government is changing the way that organisations determine the status of people they might hire to work for them – people like freelancers and contractors.
This is commonly called the IR35 or ‘intermediaries’ legislation.
Give me a bit of background
This has always been a tricky area for HMRC. People who are paid for work via a PAYE payroll system (as if employed) are pretty straight forward. Tax and NI is automatically paid to HMRC when the payment is made.
But if you are self-employed (i.e. a sole trader, or operating via your own limited company) you are officially seen as a business. This means you are taxed on profit, not income. In turn this means there are legitimate ways of reducing your tax bill.
HMRC has always been keen to make sure that people don’t just say they’re self-employed, when really they are behaving as if they’re employed. For 20 years the IR35 legislation has put rules in place to test whether someone is legitimately self-employed, and to stop people gaming the tax system.
So what’s changed?
From 2017, public sector organisations have been given the overt responsibility of determining whether a freelancer is truly self-employed, or whether they should be paid PAYE. This has mainly been aimed at self-employed people running their own limited companies.
This resulted in organisations like the NHS, BBC, universities, etc having to interpret HMRC guidelines on punishment of big fines if they got it wrong. Some decided to play it safe, with the result that some people were told they couldn’t be paid as self-employed when they should have been.
From April 2021, this system is now used in the private sector too, as long as the organisation doing the hiring has more than 50 employees and a turnover of £10.2m or more.
I’m self-employed. Will I have to be PAYE now?
Not necessarily. It depends on the type of freelance work you do, and whether you’re juggling lots of clients across the year. The change focuses on limited company freelancers, but many organisations are also reviewing how they engage sole traders at the same time.
The other thing to remember is that you might be legitimately self-employed for one job, but legitimately PAYE for another. It will depend on the nature of each job and how it’s done.
Why does it matter?
If you are running a freelance business and you are mistakenly determined as being PAYE you could receive less income. The organisation will have higher tax and NI costs so they may recoup those from your agreed fee.
There is also an administrative complication for you, especially if you run a limited company. Some of your turnover will now have been taxed before you got it, and extra NI contributions will have been made on your behalf. It will be important to keep clear records so that you can reflect this in your tax return at the end of the year. You may be able to get some tax and NI back.
If you have an accountant, they should be able to sort this for you. But accountants find this fiddly too.
There is another potential disadvantage at the beginning of the booking process. There is often a toing and froing of paperwork with the hiring organisation as they ask you to fill in questionnaires about the kind of work you do, so they can determine your status. This happens before they book you.
Where can I find a description of the rules that determine status?
If you’re a production freelancer, the best place is probably via your union. BECTU have been part of the discussions with HMRC and have lobbied hard to make sure hirers don’t mistakenly determine people to be within the legislation and therefore paid PAYE.
BECTU have a good flyer which points you at some resources:
If you want a general description of the legislation you can find it on gov.uk. But remember that this legislation was originally aimed at the construction industry and IT contractors, so some of it will feel at odds with the way we work as freelancers in the creative industries.
There is also an online “employment status” tool which the client is likely to use to determine your status. You can use the tool anonymously too, and check out the kinds of questions that HMRC deem to be important.
The tool has been updated recently and is better than it was when it was first introduced.
I haven’t got time to read all that now. Give me the headlines!
You’re more likely to be deemed self-employed if…:
- you juggle lots of clients simultaneously through the year (no fixed number, but the more the merrier)
- you have your own specialist kit – and not just a laptop
- you can do some of the work away from the client’s premises
- you are not an office holder of the client
- you fix things at your own expense if anything goes wrong with the job
- you can send someone in your place to do the job, and pay them yourself for that
- you are delivering something by a deadline which has been agreed in advance with the client
- there is no obligation for them to offer you work, nor for you to accept it
Please bear in mind this is not a definitive list. You asked for headlines!
What happens if I disagree with the client’s determination?
You can challenge it. They have to let you know in writing within 45 days why they assessed you as they did. You can ask the client for a copy of the results from the CEST employment status tool. It will show how they answered the questions. Maybe they got something wrong.
If you have an accountant they can provide a statement confirming that you’re operating in a way that is typical of self-employment.
A final word
You might have to be patient with your clients while they get used to this. Employment legislation is not straight forward, and bookers may not be quite sure what they’re doing, at least initially.
It’s not the end of the world if you end up getting paid PAYE for some work. Don’t think of it as a block to taking on work.
Everyone knows this is a tricky area, which means there may be changes further down the line – hopefully for the better. Keep your ear to the ground. That’s what I’ll be doing too.
In 2022 Liz Truss’s new government abolished all these changes to make things simpler. Six weeks later Rishi Sunak’s new government reinstated everything. #strongandstable #coalitionofchaos
Posted on 13 January 2020