In advance of IR35 legislation coming to fruition this April, now is the time to comb through your freelancer contracts to ensure that they are an accurate description of your working relationship with your clients. It could also be an optimum time to increase your project rates or to pitch new services to existing or new clients.
Checking your contract for ‘MOO’ and control
If a contractor can prove lacking in mutuality of obligation (MOO) and control, whereby they are not guaranteed work on a daily basis and are only paid on supply of work and can determine or negotiate their rate for work supplied, they are likely to be deemed a legitimate business and self-employed, rather than as a ‘disguised’ employee.
Contractors – why they need to determine rates
Outside IR35 contractors and freelancers should be in the driving seat when it comes to determining their rates or at least negotiate them in earnest and supplying their own contracts rather than signing one supplied by the hiring company.
However, many clients will want to be protected for limited liability purposes so will ask you to sign a contract that they have had drafted. If you see something in the client’s contract that is an inside IR35 red flag, then do not hesitate to show this to your client and ask it to be changed.
Key questions to ask about your freelancer contract
The key question any freelancer should ask themselves is ‘how much control does the client have over how I carry out my work?’ The second question could be ‘can I negotiate my client contract to ensure I am outside IR 35’? And if not, ‘how do I weigh up the take-home pay loss in additional National Insurance payments in addition to any umbrella company costs’?
As it stands, there is actually very little difference in personal tax between an employee and a contractor, according to IR specialist Qdos. However, the firm says that the big chunk of tax HMRC is after is Employers National Insurance, which is the 13.8% companies pay on top of their employees’ salaries.
“Unfortunately, for contractors operating inside IR35, this cost is often indirectly passed down to them,” according to Qdos CEO Seb Maley. “Therefore, in the majority of cases, a contractor operating outside IR35 will be in a far better position financially.”
The problem is, will engagers with a blanket mentality hire those outside IR35 contractors? That depends on the sector or a contractor’s tenacity to prove their services can be provided outside IR 35. If the client is happy with the working arrangement, then they are the more cost-effective choice for a client over an Inside IR35 contractor.
The energy and infrastructure industries, for example, have mixed feelings over hiring contractors and are not being as hasty on downsizing their contractors as perhaps the financial services industry has been, says an advisor serving large energy and infrastructure clients that wished to remain unattributed. This, the source explains, is because certain projects require specialised skills that could be key to the success of a project.
Construction and IR35
Infrastructure project developers and the construction contractors they work with require flexibility to scale up a project. “Now more than ever,” says the source, “firms are feeling the pressure to keep headcount numbers down, which is why contractors have long been the ideal option,” says the source. That is why firms in these sectors may be more apt to carry out IR 35 assessments to retain those key contractors.
UK-based construction workers on the other hand have the option to join the Construction Industry Scheme (CIS), whereby hiring contractors deduct money from a subcontractor’s payments and pass it to HM Revenue and Customs (HMRC).
The deductions count as advance payments towards the subcontractor’s tax and National Insurance.
What does IR35 insurance cover?
If on inspection a contractor feels they may be caught in a questionable employee status under IR35 for previous contracts, then there is IR 35 insurance to consider. Liabilities could be significant, with interest and potential penalties added to them.
Insurance should meet the needs of the self-employed inside and outside IR35, which typically has two elements. According to Qdos, firstly a policy will cover the defence costs in the event of an HMRC investigation, given that IR35 enquiries can typically take upwards of 18 months to conclude. Some policies may also go one step further and cover the potential liabilities if a contractor is ultimately found to be inside, or ‘caught’ by IR35.