IR35 – Is it still worth being self-employed?

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With the introduction of IR35 on 6 April 2021, it is concerning to see the rate of self-employment falling with reports that 50% of freelancers plan to quit due to lower wages and an estimated 170K self employed contactors will be forced to pay more tax. It is also interesting to see HMRC pursuing Gary Lineker for £5m in alleged ‘unpaid’ taxes as he should have been operating ‘within IR35′ whilst contracted to the BBC and BT Sport. It shines a spotlight on the merits of continuing to operate via a personal services company and will lead many to consider if the ’employed’ route is the safest option as far as staying off HMRC’s radar.

 IR35 isn’t the only reason for the fall in self-employed numbers; the Covid pandemic has been responsible for many small business failures and highlighted the attractions of working as an employee with all the relative security it entails.

What is IR35? Under IR35, responsibility for determining a worker’s employment status lies with the agency contracting that worker’s services.  If the worker is found to be employed, the agency must register the worker for PAYE and deduct tax accordingly.

Which businesses are affected? From 6 April the IR35 extends beyond the public sector to many private sector companies unless they are small, defined as:

  • Annual turnover £10.2m or less
  • Assets of £5.1m or less
  • Employees of 50 or less

A significant number of private sector businesses have already determined their freelancers to be in fact employed, resulting in the freelancer facing lower wages (to cover the employer’s increased IR35 tax & NIC bill) or converting to employed status.

Advantages of being Self-Employed

There are many advantages of working for yourself, even in these challenging times and they include:

  • Lower tax rates
  • Flexibility around working hours, locations and conditions
  • Being your own boss – having control over business strategy and direction of the business

Determining employment status

Factors to which point to an individual being employed include:

  • Being entitled to sick pay, annual leave, a company pension etc
  • Being told what to do by the agency engaging the services
  • Being paid an hourly rate instead of monthly

Indications of self-employment include:

  • Providing tools and equipment to do the job, such as own laptop, IT equipment, ladders, etc
  • Bearing risks and enjoying rewards, such as enjoying profits or absorbing losses
  • Being in control of where to work, choosing when to work and for how long

There are many more factors to consider when deciding employment status and therefore tax treatment of the worker. We anticipate HMRC watching this area closely and clamping down on perceived tax avoidance at the earliest opportunity.

Our tax specialists can advise and guide on this area to ensure businesses and individuals correctly apply the new rules and stay tax compliant. Please contact [email protected] with your queries and discover how Curo can help optimise your tax position.