sWhat is the intermediaries legislation?
The intermediaries legislation (or more commonly known as IR35) is a way in which the HMRC will target tax avoidance and ‘fake employees’ in the future.
The legislation will come into power in April 2020 for all private sector businesses & workers (This is already in place for the public sector) ,and will focus on relationships between workers and businesses.
Any worker found to be working under IR35 will be subject to higher taxation and restrictions on expenses for certain clients or businesses.
Here is a brief insight and breakdown of how to navigate through this new legislation. Please note: This article is for guidance only and should not be relied on as absolute law. Remember every persons working situation is different and the implications of IR35 will differ from each case.
What will determine whether I’m an employee or a sole trader with a individual client/business?
When the HMRC looks at workers and whether their an employee or not is how they are controlled. This includes;
– Is the worker in control of their working hours?
If someone is controlled on when they will work (including taking breaks, an the time they finish) it will be classed on the side of the employee.
Whereas a sole trader will have direct control of their hours including start/ finish times and breaks based on the ‘contract’ that is required to be completed (more on these ‘Contracts’ later
– Is the client in direct control of how the work/task is completed?
If the management instructs and directs exactly how a piece of work or task is to be completed and gives no control to the worker, then they are classed as Employed.
A sole trader on the other hand will be in direct control. They may be instructed on what is required of them, but they must be given complete freedom on how they are to complete the task.
What Sole traders must remember is they are liable for costs and must rectify any work which does not meet the clients expectations.
– Is the work regular/ Occasional/ One off?
If a worker is committed to over 30 hours a week on a constant basis for 1 client, they will likely be classed more as an employee.
If they only complete 1 days work over a month and do less than 28 days work a year for a single client, they are more likely classed as a sole trader.
If a worker only completes 1 days work throughout the whole year for a client, they will be classed as a sole trader.
(Exact number of days will vary dependant on the contract agreed by both parties)
– Is the worker able to provide cover in their absence?
If a worker is absent and can not provide any cover or substitution to complete the agreed contract, they will likely be classed as an Employee (dependant on the contract and type of work)
If a worker is absent but can readily supply cover or substitution to complete the contract, they will be classed as a sole trader.
– Can the worker pick their own working days and refuse work at will?
If a worker has any limitation on days of work for a contract, they are Employed :
“if you are working as a freelance chef in a kitchen and you are told, you’re working next Friday and you have little choice on the matter. You would be classed an employee by the HMRC”
If a worker has complete control and can refuse work as they wish, they would be classed as a sole trader.
So how does this affect chef related work?
The biggest problem for freelance and self employed chefs is that we tend to have very little control of working hours, breaks and how we complete our tasks.
What is also a big problem is the lack of contract based work as it relies on the consumer walking through the doors of the clients we are working with.
If you’re caught under this Legislation, the client will have a responsibility to pay you as an employee (thus deducting Tax & N.I contributions from your invoice).
What you will also find is your unable to claim expenses (or only a %) for the work you complete for the individual client
How to combat and avoid IR35?
Here are some (not all) key areas you need to identify and work on so you ensure you avoid falling into the IR35:
Keeping control of how you perform your work is one of the big areas. If you are told constantly “we don’t do it like that” then you have a problem. The idea of a sole trader/ business is to provide a service to the client. It is not the clients place to instruct the worker how to complete the task, that should remain in the workers control.
The control of hours/ breaks. Will be harder, but not impossible. As these will fall under the ‘contract’ area of this article.
Contracts, Contracts, Contracts
If you’re completing one day, or one month. Make sure its done through a signed contract. Never complete work via verbal confirmation.
When writing up a contract, avoid words and terms which would normally be used in an employment contract such as “absence”, “overtime” and “holidays”.
Make sure when writing a contract it includes the exact outlines of your duties and the ‘end-result’ to complete the contract.
If possible, ensure you avoid including an extension of contract as this could cause a possible ‘employee’ scenario.
When writing the contract, ensure you include any start and finish times if required and ensure you complete the work based on the contract (never start earlier or finish later than these times. remember, you have to remain in control)
If your not sure how to write a contract. Contact your accountant who should be able to write one up for your (for a fee)
Work out the contract value/day rate. Not hourly rate.
Most freelance chefs will work on a hourly rate which could cause problems once IR35 comes into play.
A safer way would be to set a day rate or a total contract value (if services are required for a longer period of time then a contract with a total value would be more suitable)
It might also be worthwhile working out a half day rate for small jobs.
Maximise your number of clients
This will go without saying, look to work for as many different clients as you can, not just 1 or 2 clients.
Working for multiple clients over 1 month will show your more inclined to decide when you work and who for, which will work better in your favour as a sole-trader
Rotate your clients
When you’re working for a client on a regular basis, ensure you keep doing other work for different clients. Especially if you end up doing a full 48 hours for 1 client in a week.
Take a couple of weeks or even a month away from a client working elsewhere if you feel your becoming too regular at the clients business.
Ideally avoid working longer than 28 days (or 1 month) in one single calender year as a relief chef for 1 client.
NB: This will be a defining subject in a lot of sole-traders case for IR35.
Substitution means having an additional means of completing the work either off site (if its office related) or by hiring out other contractors to complete the work on behalf of your business (or you).
You may need to have substitution in the event you become ill, your car breaks down, you need to take personal leave ect. Once you’ve signed the contract of services (or an agreement) you must comply with the terms set out including the dates of work and tasks to be completed.
When you use a 3rd party contractor to complete the contract on your behalf, you must pay the contractor from your business (not the client) and then receive the original amount from your client (you’re likely to make a loss if this happens)
To prepare for this instance, contacting other freelance chefs or sole traders with arrangements to cover each other in the event of illness or other absences can be a real boost against IR35. Also be sure to have any arrangements/agreements in writing ready for the HMRC.
Lastly, also keep records of any time you have used substitution to further boost your case of running as a sole trader.
When communicating with clients either for marketing or check-ups by email or text, remain completely professional and business minded using properly constructed sentences and language.
Avoid delving into personal matters and workplace gossip as these emails may be used if your case is ever taken into consideration for IR35. Also ensure each client receives fair treatment from your business. If you implement charges for late payment for one client, ensure every client is dealt the same hand and any other client that pays late receives the same charges.
What about freelancing through agencies?
Freelancing through agencies will follow mostly the same rules.
Agencies will have to keep track and maintain judgement on a workers role in a business.
If a worker is found to be working as a employee, it will be the agencies responsibility to inform the worker rather than the clients (whoever directly pays the worker, must decide on their employment status based on IR35)
*Please note: Although agencies will have to follow IR35, they are mostly controlled by the ‘Agency Workers Regulations – 2010’.
Thats it for now. Please note this article will expand over the coming months as more research is completed into this matter and things become more clear.
For more information, Please contact firstname.lastname@example.org or call 07551 072741l