It is easy to think – oh my freelancer has their own company so nothing to do with law or tax is going to be a problem for me. If they are the only person in their company, then this is not always the case.
The law on IR35 (tax) and equality for freelancers keeps changing
In the last few years, the old assumptions legal rights for contractors and gig economy freelancers have constantly been challenged in the UK courts. Cases have come and gone in the courts but the days of telling everyone they are self-employed are coming to an end. People who invoice you through their companies have rights and you have an increasing range of obligations if you pay them.
A personal service company has discrimination rights
A personal service company (PSC) is a legal entity in its own right. All companies are. Otherwise, you could not enter into a contract with them. Our law works on the basis that a company is a ‘legal person’ even if it is not an actual person. A PSC is a company that has just one person in it – the person who is doing the work you are paying the company for.
The PSC is associated with that person (who is usually a Director and shareholder and sometimes also an employee of that company).
If you stop using a PSC because the person you pay that way is too old, or pregnant, or disabled, or for any other equality related reason – then you can’t use the fact it is a company to get out of a discrimination tribunal. If the company is subject to a detriment (eg you stop booking work through it) because of its association with a person who has an equality protected characteristic – eg age, race, gender, etc) then the company can have a discrimination claim against you.
If you want to know more about the technical reason for this, check out the Employment Appeal Tribunal decision here.
IR35 (tax) is changing
HMRC has long had the power to make you deduct the equivalent of PAYE from PSCs.
The rules changed in April 2020 to make the public sector clients responsible for:
- asssssing the IR35 status of each PSC they pay
- making deductions
- being fined if they fail to correctly assess deductions are due
- interest on late payments
This system is not popular with anyone since assessing each contractor/freelancer is time-consuming and HMRC’s own tests are not reliable. There is no right of appeal against this decision so many contractors left the public sector or put up their fees as a result.
In April 2020 the government plans to extend this IR35 arrangement to the private sector
This will mean many more businesses making those assessments and many more being caught in the net of IR35 deductions – including many where the sole owner is not a taxpayer. Even more are unintentionally caught in the net. Some say it will kill the solo entrepreneur start up.
What do you need to do?
You need to set up arrangements that do not accidentally bring the people you pay inside IR35. These genuine arrangements should then be reflected in the way you operate day to day and the contracts between you.
If you are a micropreneur providing services, you are at risk of being caught in this trap. You will need appropriate terms of business and ways of working to keep you outside the IR35 assessment and a pricing strategy to account for what happens when you fall inside IR35.
We have already started work in our KoffeeKlatch customer support groups to help our customers get ready for this change. Despite everything that is going on with Brexit, this is not a change you need to be ignoring.
If you are worried about what you are already doing – talk to us in confidence – call us on 020 3887 0500 or email email@example.com
This article was first published in October 2015 and was updated most recently in January 2019.