You may or may not have heard of IR35, but it has the potential to radically change the way organisations engage with freelance bid writers. April 2020 sees the expansion of IR35, also known as the “off payroll working rules”, from the public sector to all businesses. Literally dozens of bid writing freelancers in the UK could be affected! But what exactly do the changes really mean?
Historically you could hire a freelance bid writer, let’s call him Trevor, and have him work for you exclusively on an in-house basis for a fixed interim period. Trevor may have a desk at your premises, which has become his regular place of work, as well as his own company e-mail address and phone number. To all intents and purposes there is no distinction between Trevor and your other employees. The only difference is how Trevor is paid. He submits a monthly invoice for services delivered, rather than receiving a regular pay cheque.
This all sounds fine in practice, but cases such as this are being called out for tax avoidance. This is because Trevor may be billing his fees through his own limited company and paying himself primarily though a dividend on his profits, rather than a regular wage.
For example, if Trevor was earning over £40,000 a year as a regular employee, then he would pay around £9,000 of that in Income Tax and NI. If, however, Trevor was billing £40,000 in fees to his client each year, then he would only pay Corporation Tax on the profits from those fees. This could be a fraction of his equivalent Income Tax bill. If you multiply that difference by all the freelancers working in this way nationally, not just the bid writers, you can sense why HMRC are keen to clamp down!
The new rules mean that Trevor’s client will now have a legal obligation to determine his employment status. This will consider factors such as whether Trevor must carry out his bid assignments personally, or if he can offer a substitute? Is the client obligated to provide work to Trevor, and can Trevor decline it? Does the client have control over how, when and where Trevor carries out his work?
If, on the back of this assessment, the client determines that Trevor is effectively an employee, then the client is obligated to deduct Trevor’s Income Tax and National Insurance Contributions from his fee and pay this directly to HMRC (effectively putting him on the payroll). To maintain the same fee, Trevor must therefore increase his day rate, assuming of course his client is open to that. Alternatively, Trevor could be faced with a sudden and steep drop in his effective take home pay.
There are lots of risks and permutations for all sides. For example, if the client decides that Trevor is not an employee, but then HMRC subsequently decide that he is, this could see the client having to pay Trevor’s full fee and then being forced to pay additional tax and NI on top. Not surprisingly, some firms are worried. A recent survey by bedigitaluk.com indicated that 41% of firms in scope of IR35 would review their strategy for procuring freelancers, and 11% saying they will cut freelancing.
So, what can you do? Well if you are a freelance bid writer who may fall within the scope of the revised IR35 regulations, or if you are an organisation who engages freelance bid writers on an exclusive in-house basis, then you need to start a conversation. There is a lot of information on-line which details how the rules may apply, and to help you understand if and how you may be affected. There are a variety of exclusions from the regulations, so it is important to check how they relate to you. There is also information about what you should do if you disagree with your client about the employment status determination which they have reached.
Preparation, as with all things, is the key. Forewarned is forearmed! Whilst many bid writers will be completely unaffected, the new regulations could have a significant impact for others. April will be here before you know it, and nobody wants to be an April Fool!