If your business employs freelancers, beware of regulatory changes

Time is running out to prepare for new tax rules that could cause freelancers and contractors real problems when securing work and give many companies a headache too. While there have been calls to postpone changes to the "IR35" regime across the private sector, the government is refusing to budge from the April 2020 start date.

The aim of the reforms is to stamp out what ministers believe is widespread tax avoidance through "disguised employment". This is where a business hires a freelancer or a contractor set up as a limited company to do work, rather than taking on an employee. Such a structure has tax advantages for both sides, but the business then simply treats the freelancer or contractor in the same way as an employee.

Currently, contractors are responsible for declaring they are IR35 compliant that they are genuine freelance operators, rather than simply acting as an employee of the business for which they're working. From April, however, firms hiring contractors will be responsible for determining whether they're entitled to IR35 status and at risk of penalties if they are deemed to have made the wrong decision, resulting in a tax loss for the Treasury.

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While a similar arrangement is already in place for public-sector organisations that hire contractors, many accountants believe the reforms are fraught with difficulties. Research by accounting software provider FreeAgent found that 75% of accountants think the reforms should be postponed. So far, however, ministers insist the changes will come in as planned next April. So both businesses hiring contractors and contractors and freelancers themselves must make sure they are ready for the changes.

Prepare for IR35 changes

The good news is that smaller firms are exempt. Those turning over less than £10.2m a year and with fewer than 50 staff won't be responsible for determining contractors' IR35 status. But larger firms must confront the situation. Some are simply deciding not to continue with contracting and freelance arrangements in their current form instead, they'll take on staff on fixed-term employment contracts. If they do want to keep contracting with limited companies, they must understand how to determine their IR35 status.

The problem here is that there is no definitive test HM Revenue & Customs looks at each case on its merits. Broadly, however, there are three crucial tests of whether a contractor is entitled to IR35 status, rather than at risk of being considered a disguised employee.

Control is one crucial issue the more control the contractor has over what work they do, how they do it, when and where, the more likely they are to be considered IR35 compliant. HMRC also looks at substitution whether the contractor always has to provide the work themselves, or whether they could do it through a substitute. The third principle is mutuality of obligation whether the contractor is guaranteed to receive work and obliged to accept it; if this is the case, IR35 status is harder to prove.

In practice, however, these are subjective tests. Even HMRC's own online "check employment status for tax" (CEST) tool provides conflicting results. So if your business will fall within the IR35 regime from next April, you should be reviewing arrangements with contractors now and deciding on the best approach for the future.

Similarly, contractors need to plan ahead too. Talk to firms that currently provide you with work about the approach they plan to take it may even be possible to secure a "confirmation of arrangement" contract, which shows both sides agree your IR35 status has been checked and agreed.

It may also be worth establishing yourself as a genuinely independent and legitimate business. Do you have your own office address, website, insurances and so on?

Contractors who don't have IR35 status will in future have to be treated in the same way as employees. Employers will be required to deduct income tax and national insurance at source from payments.