Could the Treasury’s argument for private-sector IR35 tax equalisation scheme of freelancers be flawed? In some ways verging on the unjust? Will certain segments of the self-employed workforce now be paying for the privilege to work? These are the questions keeping many of the UK’s self-employed up at night.
If you have been ‘bossing it’ yet feel once the IR35 tax regulations kick in on the 6th of April that you will be just a cog serving a client’s company, but without the employment rights, you won’t be alone.
“Employment law doesn’t cover self-employed people in most cases because they are their own boss,” the government has stated on its Employment Status page.
If a freelancer is not covered by employment law, then should they be taxed the same as an employee? so the argument goes.
In a recent article published by the ICAEW, “IR35 and employment status: no silver bullet”, Mark Hammerton, a partner in the human resources practice group of law firm Eversheds Sutherland, highlighted the glaring difference in protection between the employed and self-employed.
Employment protection (or lack of it)
Hammerton explained there is a vastly different array of employment protection rights for different statuses:
Employees: For employment law purposes have the most rights. They have the right to declare unfair dismissal when the putative employer decides he no longer needs the individual. They also get statutory redundancy pay.
Workers: They are in the “halfway house category” with some rights. For example, they have the right to establish a minimum holiday pay or annual leave under the working time regulations.
Self-employed or independent contractors: They have almost no statutory rights.
According to the government the self-employed have some rights:
- they still have protection for their health and safety and, in some cases, protection against discrimination
- their rights and responsibilities are set out by the terms of the contract they have with their client
Self-employed and contractors
“A person is self-employed if they run their business for themselves and take responsibility for its success or failure,” says the government.
So that would mean if a contractor or freelancer was no longer required on a project or their client was not 100% satisfied with their work, the client could argue discounted or non-payment or just go quiet very quickly (as the notice periods for most freelancers can be anything under a week).
Employers cannot go quiet on their employees or drag out when they will give them gainful employment or pay. That is the risk freelancers take and that is why they cannot afford to put all their eggs in one basket.
“Self-employed workers aren’t paid through PAYE”, says the government, but many have been forced to go the PAYE route when certain companies or industries (banking, financial services and insurance) just make blanket bans on freelancers or contractors that have their own limited company or Personal Service Company. Contractors are given a take it or leave it approach by some hiring companies.
Many contractors ‘have to be PAYE’ if they want to continue providing services to a company but via an umbrella company, not even the client. That means as the contractor they don’t have the employment rights, benefits and perks of employees they may collaborate with. Freelancers and contractors for the most part have understood that (outside the hail cab and contract delivery gig economy, which is a whole other kettle of fish). But what they are finding hard to understand is why they are paying for something yet can expect nothing in return.
From April 6th 2021, under IR35 tax regulation, clients or ‘fee-payers’ will be obliged to pay for Employer NICs when a contractor is Inside IR35. While it would be wholly unfair for the fee payer to try to pass this additional cost onto the contractor it is anticipated they may try to lower their contractor day rates directly or with the recruitment or staffing agency. And they will have a whole slew of reasons why.
It would seem these odds (no rights) and costs (umbrella fees and possible lower day rates) are rising against today’s freelancers and contractors. However, what is running parallel with these challenges is what is fast becoming a broken argument for IR35 or any similar ‘tax equalisation’ schemes for the self-employed.
Hiring companies implementing IR35 – which option will your client pick for you?
Hammerton expressed in the article five options the employer is left with when deciding how to use contractors in the business.
- An “outright bar”: a complete bar on the use of any personal services company in its supply chain, such that IR35 will not be applicable.
- Hire individuals directly and bring them as “express employees” onto the payroll.
- Treat contractors as employees for tax and NIC, but not for employment rights purposes.
- Move into a fully outsourced service model where the organisation effectively outsources an activity, product, or service.
- The use of one or more umbrella companies.
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