Our very own Liz Norman recently wrote a piece on the impact of IR35, this blog article first appeared on Research Live.
From April, the government’s IR35 legislation will bring changes to how off-payroll freelancers are taxed. Liz Norman outlines what the changes could mean for the market research industry.
The insight industry has traditionally relied on large numbers of freelancers. It facilitates the ad-hoc nature of a lot of the work, allows the industry to bring in specialist skills when needed, and means a lot of experienced professionals can work flexibly to accommodate other important things in their lives.
IR35 has already been applied in the public sector. When the legislation is applied to the private sector on 6th April, IR35 won’t stop the freelance market altogether, but many believe it will curtail it, resulting in changes for both employers and employees choosing to work in that way.
IR35 is all about tax. The government believe that they are missing out on taxable income by allowing freelancers to be self-employed or operate as limited companies. Companies don’t pay employer’s National Insurance of 13.8% on payments to freelance employees as they do permanent employees. In addition, freelancers can pay themselves dividends, which is more tax-efficient than a tax on earnings. The government believes that by discouraging this market it will raise billions in extra tax revenue.
The money the government expects to raise has to come from somewhere. Employers may reduce rates to cover their additional costs. In addition, the freelancers’ net pay is likely to drop as PAYE is less tax efficient.
Two key changes:
- If the correct tax is not paid by the freelancer, it will be the employer that is liable – not the employee
- It will no longer be possible for freelancers to justify operating as limited companies because they work for several employers.
The good news is the rules won’t apply to every employer. Small companies, as defined by the Companies Act, are exempt.
A company is ‘small’ if it has any two of the following:
- A turnover of £10.2m or less
- £5.1m or less on its balance sheet
- 50 employees or less.
The insight industry has a lot of organisations that qualify as small – the 2019 MRS league table shows just 63 individual agencies have a turnover in excess of £10.2m. It will be interesting to see if, moving forward, most freelancing is done only for boutique agencies, rather than end clients or larger research agencies?
For larger organisations, it is possible to employ freelancers directly but only if they fulfil all the following criteria:
- Substitution – the freelancer must confirm to the employer that if they aren’t able to work for part of the contracted period, they have someone that can do the work in their place
- Supervision, direction and control – the freelancer should be setting the agenda – decide on the approach needed, advise on hours, and complete the project without close supervision.
- Mutuality of obligation – this is the most hotly debated part of the criteria and it isn’t clearly defined. It refers to financial responsibility – is the contractor financially independent, do they have other income, is it acceptable not to pay them if the work isn’t satisfactorily completed?
If HMRC find that not all the criteria has been met and the correct tax hasn’t been paid by either the freelancer or the employer, then the employer is liable. So, it is up to the employer to check if the roles are legitimately ‘outside IR35’ allowing them to take on a freelancer. If the employer is certain that the work is outside IR35, they should confirm that with the freelancer before the work commences. Contracts must be drawn up which reflect the new criteria.
This shift in responsibility means several large companies have already stated they won’t be employing freelancers directly moving forward, instead of putting them on third-party payrolls.
To help companies check the status of their roles, HMRC has produced an online tool; CEST (Check for Employment Status for Tax). If employers can demonstrate they have used this to verify the status of the freelancer, they are less likely to be fined.
If the roles don’t meet the criteria to be ‘outside IR35’, it is possible for employers to use freelancers by putting them on the payroll of a third party, such as a recruitment consultancy or an umbrella organisation. This is going to cost the employer more, as in addition to paying the third parties costs, they will be paying employer’s NI. It is likely they will pay the freelancer less to cover this.
Another route could be for the organisation to employ the freelancers, either on a part-time basis, or on a zero-hours contract. This too costs the employer more as they will have to pay employer’s NI.
Without a crystal ball, it is impossible to know exactly how this will impact on the freelance market for either freelancers or employers – what we do know is the impact is likely to be a large one.