The government plans to extend the off-payroll working rules (IR35) into the private sector this April, which could drastically affect freelancers’ income and tax status.

HMRC has updated its official guidance on the planned IR35 tax reform with a new factsheet outlining the planned changes that are due to be implemented in April 2020.

ir35 tax for freelancers

The factsheet, which you can read here, aims to address some of the concerns raised by freelancers and contractors regarding whether they will be affected by IR35 – and by what degree the changes will impact their tax responsibilities.

On who will be affected by the IR35 change, the factsheet says:

“You are affected by the changes to the off-payroll working rules (IR35) if:

  • You are a contractor who works through an intermediary, e.g. your own limited company, often known as a personal service company (PSC), and
  • You provide your services to public sector organisations or medium or large-sized organisations outside of the public sector.

A medium or large-sized organisation will have a turnover of more than £10.2million, a balance sheet total of £5.1m and/or more than 50 employees.”

Under the proposals, all medium and large-sized organisations in the private sector will be responsible for deciding the employment and tax status for the freelancers and contractors they use. This has been the case for the public sector since April 2017, and is due to come into effect for both the private and third sectors on 6th April 2020.

The reforms mean that businesses and organisations that hire freelancers will have to undertake the process of determining their tax status and producing a ‘status determination statement’ which will set out what they have decided and how they came to that determination. If the organisation determines that a freelancer is being employed for tax purposes, then they (or the agency they hired the freelancer or contractor through) will be liable to pay the necessary tax and National Insurance (NICs) before paying the contractor.

If it is determined that the freelancer or contractor is self-employed for tax purposes, then they will remain responsible for managing their own tax affairs and meeting their obligations.

How freelancers could be affected by the IR35 change

HMRC’s factsheet warns that the IR35 reforms could lead to freelancers and contractors paying additional tax and National Insurance contributions.

It states: “It is also possible that you will pay additional income tax and NICs if you had not previously been applying the off-payroll rules (IR35) correctly. However, HMRC will not use information resulting from these changes to open a new enquiry into earlier years unless there is reason to suspect fraud or criminal behaviour.”

The factsheet goes on to advise freelancers that there is no specific action they can take in preparation for IR35, other than to seek a Status Determination Statement from your hirer.

Freelancers and contractors can also find further information and guidance here: https://www.gov.uk/guidance/april-2020-changes-to-off-payroll-working-for-intermediaries and check their employment status here: https://www.gov.uk/guidance/check-employment-status-for-tax

Although the factsheet makes reference to the review the government has launched into the IR35 reforms, it makes clear that the changes to the off-payroll working rules remain scheduled to be implemented on 6th April 2020.

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