What does IR35 mean for UK freelance motion designers?with Andy Chamberlain
Disclaimer: This podcast is for general guidance only and discusses the legal position in the UK at the time of publication unless stated otherwise. You must take legal advice and not rely on the information provided in this podcast before taking action. We do not update our podcasts and therefore, past podcasts may not reflect the current legal position.
There are 5 million self-employed people in the UK and if you’re listening to this episode, it’s likely you’re one of them.
If you’re a freelance motion designer you’ve probably heard about the IR35 tax law – but what does it mean for you and the way you do business?
In today’s episode you’re going to find out.
About Andy Chamberlain
Andy Chamberlain is the Director of Policy for The Association of Independent Professionals and the Self-Employed (IPSE).
IPSE is the only non-profit organisation in the UK providing support to independent professionals and self-employed people in the UK.
What is IR35 and does it affect me as a freelance motion designer in the UK?
IR35 is a term used to describe two sets of tax laws that stop what is known as “disguised employment”.
This is when an individual acts like an employee and is treated like an employee but they disguise that employment by portraying themself as a limited company rather than an individual.
By doing this, both the individual and the employer who is hiring them essentially pay less tax – however it’s illegal and a form of tax evasion.
IR35 will only affect you if you’re an individual operating as a limited company. If you are a sole trader, it does not apply.
So what is changing with IR35?
As it stands, the government is changing the way that IR35 works in the private sector – moving the responsibility from the individual receiving the payment to the end client.
The issue with this is that now many individuals are having to pay tax like an employee even though the company they work for gives them no employee benefits.
As an employee, when you get paid, the amount you receive has already had the tax and national insurance deductions taken out of it.
Under new IR35 rules, the same will now happen for self-employed people. This is making companies less likely to hire self-employed people, because they don’t want to spend time putting them on their “books” and making tax deductions if they won’t be with the company for very long.
Therefore they are now advising self-employed people to work under an umbrella company who will make those tax deductions for them instead. This is because if they pay someone through their payroll, they have to make employers national insurance contributions which is an additional 13.8%.
Umbrella companies also don’t want to have to pay the 13.8% so they say to the individual “we need you to reduce your day rate so that we can afford to pay your employers national insurance contributions.”
So who benefits from this new system?
The only person who is really benefiting from this new system is neither self-employed people or the end client – it’s the government.
Rather than waiting a year for a self-employed person to submit their tax return, they are now able to gather a lot more tax from self-employed people more quickly.
End clients are now worried – because if they say that IR35 doesn’t apply to a contractor they are working with and carry on paying them their gross pay as before, HMRC can approach them at a later date and they will be held liable.
Because IR35 is so complicated, many end clients are choosing to put all self-employed workers under the IR35 rules rather than risk being penalised later on down the line.
Does IR35 apply if I am a sole trader?
IR35 only applies if you are a self-employed person working as a limited company and not if you’re a sole trader.
Historically end clients have preferred to work with people who operate under a limited company because it mitigates their risk. For example, there are some laws that apply whereby if a sole trader didn’t pay the correct tax, the person who paid them could be liable.
If you currently have a limited company and are concerned over the implications of IR35 on you and your freelance business, you could consider dissolving your limited company and become a sole trader, provided your clients were still happy to work with and pay you on that basis.
There are benefits and drawbacks to being a sole trader or a limited company. Ultimately, only you can decide what is best for you.
Am I inside or outside of IR35?
Andy explains that for employment to exist, you need to have each of the following:
- Personal service – one individual required to do the work themselves, they cannot send a substitute. If you feel you can send a substitute to do your work, this is one of the key ways in which you could dispute an IR35 claim.
- Mutuality of obligation – is the end client obliged to provide the contractor with work and is the worker obliged to accept that work and do it? Contractors are able to turn down work, whereas employees are obliged to carry out any work they are given.
- Control – how much control does the individual have over the work they are doing? If you are an employee, the employer has the right to control your work. However, if you’re a freelancer, you are largely able to dictate your own work and the way in which you produce it.
If you can prove that any one of these three elements does not exist in the end client relationship, then IR35 does not apply to you.
What can I do as a freelance motion designer to prepare for these times?
Andy advises freelance motion designers to consider what factors distinguish them from paid employed inside the companies that they are currently working with.
If you are unsure whether IR35 applies to you or not, you can use the Check Employment Status for Tax tool (CEST) on the Government website, print out the results and show them to your client.
Small company exemption rules
The rules we have covered so far in regard to IR35 tax rules only apply to end-clients who are medium or large in size. Small companies don’t have to make these considerations under the small company exemption rules.
A small company has to meet two of the following three criteria:
- The company has less than or equal to 50 employees
- The company has less than or equal to £10.2 mil turnover
- Less than or equal to 5.1 million on their balance sheet
Protecting yourself with a Statement of Work Contract
A statement of work is a type of contract that sets out the set deliverables and milestones required for you as the contractor to carry out the work. Payment is then on delivery of those milestones.
If you have a contract like that then it makes it very hard for anyone to claim IR35 applies to that written contract, so long as the work carried out matches what was in the contract.
A Statement of Work Contract could be a great way to carry on working as you have been with no IR35 implications.
If you’re unsure about your existing contracts, consider paying to get them independently reviewed.
Andy finishes off the episode by answering some frequently asked questions that have been submitted by Motion Hatchlings, so make sure you listen to the end to see if your questions have been answered.
Ultimately, the best advice around IR35 is making sure you have researched the topic and are aware of your rights should your clients try to claim you are within IR35 when you know you are not.
Do you have any other questions about IR35? Do you think it’s going to affect the way you work?
Leave a comment on the episode page and let us know!
In this episode
- Andy explains his background and what The Association of Independent Professionals and the Self-Employed (IPSE) does [0.12]
- The origins of IR35 and what it actually is [0.48]
- Why IR35 affects the way end-clients work with freelancers [4.00]
- Is working under an umbrella company a good alternative? [04.24]
- The benefits and drawbacks to working as a private limited company vs. being a sole trader [07.48]
- Should I close down my limited company and become a sole trader? [10.14]
- The three deciding factors to determine whether you are inside or outside of IR35 [12.20]
- How to get your contracts independently reviewed [19.02]
- Why it’s important to have a contract when you work with clients or agencies [26.24]
- Andy answers questions from Motion Hatchlings about IR35 [27.51]
- A summary of what freelancers can do to protect themselves when it comes to IR35 [34.58]
“No matter what sector you’re working in, IR35 impacts you.” [1.43]
“If you think that your client would be more prepared to work with you on a genuinely self-employed basis then closing down your limited company and becoming a sole trader could well be worth doing.” [10.16]
“For employment to exist you need to have each of the following: personal service, mutuality of obligation and control.” [12.20]
“It’s not just about the written contract, it’s about the real-world practices.” [19.25]
“You might want to think about why you get treated not as an employee. Are there things that distinguish you from employees?” [19.35]
“IR35 works on an engagement to engagement basis which means that one contract might be classed as IR35 and one might not be. Having lots of clients doesn’t technically get you around it. But generally, if you do have lots of clients it’s likely that you will be outside of IR35.” [28.35]
“It’s very good to have a little folder of evidence, that should you need it you can show it to your client and say ‘Hang on, IR35 does not apply’.” [35.52]
IR35 is going to have an undeniable impact on the way you work if you’re a freelancer operating through a limited company.
Find more guidance on IR35 on the IPSE website.
Follow Andy on Twitter and LinkedIn.
Hayley Akins (00:36): Hey, hatchings welcome to episode 84. So before we jump into this episode, I want to tell you quickly about our free challenge that we're doing this week. If you're listening to this on the day of release, we are starting our motion designer, client challenge. I'll be going live every day, sharing with you tips for getting regular high paying clients and setting you a daily challenge to help you to do that. So if you want to join us, go to motionhatch.com/challenge to sign up. You can join any time throughout the challenge and get the replays. So if you're listening to this in the future, you can join us. And if the challenge isn't open at the current time that you're listening, you'll be able to go to that page and sign up for future challenges. So that's motionhatch.com/challenge. Today on the podcast, we have a slightly different episode.
Hayley Akins (01:25): So usually on the show, we speak about things that apply worldwide and we bring guests and experts on from all over the world. However, today is a little different because we're talking about a piece of tax legislation that only applies in the UK. So for all you hatchlings in different countries, we have another great episode coming up for you. In two weeks time with Mary Hawkins will be talking about side hustles. This episode only applies to motion designers running their business in the UK. So if you're a freelancer or a studio in the UK, then do carry on listening to the show. We have had many UK freelancers reach out and request this episode, which is why we thought it was important to do it. So we are talking about our IR35, if you've never heard of IR35 before, and you're a freelance motion designer in the UK, please do keep on listening because this is really important. I brought Andy Chamberlain on from IPSE to tell us about the new legislation, which is due to come into effect in April, 2021. Just a little disclaimer, before we get into the show, that neither Andy or myself are lawyers, and this is for educational purposes only. So we always recommend that you seek professional advice if you need it. So let's get into it. Hey Andy, thanks so much for coming on.
Andy Chamberlain (02:42): Hi Hayley, thanks very much for having me.
Hayley Akins (02:44): To start with, do you want to tell us a bit about yourself?
Andy Chamberlain (02:48): Yeah. So my name's Andy Chamberlain, I'm the director of policy for IPSE. IPSE is the association of independent professionals and the self-employed. So it's I P S E and we represent self-employed people in the UK. There are 5 million self-employed people. Many of them are sole traders. Many of them operate through their own limited company. And the thing that I think you want to talk to me about today is IR35. And that affects those who work for their own limited company.
Hayley Akins (03:20): Yeah, that's right. So do you want to start by telling us what I R 35 is
Andy Chamberlain (03:27): IR35 is set of tax legislation, which is designed to prevent what is known as disguised employment. And this is where someone acts like an employee and is treated like an employee by the people that they're working for, but they pretend, or they disguise that employment by putting in place a limited company that sits between them and the organization that they're working for. If they do that, it's, it's possible for them to pay a bit less tax. And also the organization, which is engaging them, pays less tax than they would do if they were just to employ that person directly.
Hayley Akins (04:05): Yeah. So a lot of the audience are probably sole traders or limited companies and they're freelance motion designers. Do you think this is something that we should be paying attention to?
Andy Chamberlain (04:17): Yes, it will. It will. It impacts everyone, no matter what sector you're working in, it impacts you. The problem at the moment is the government are making a change to the way that IR35 works in the private sector. So what they're going to do is they're going to move, who has the responsibility for thinking about IR35 status, who has to work out, whether IR35 applies or it doesn't previously, or, you know, right now, as we record this, it is up to the contractor to work it out, the individual. So in your case, it would be the creative people that are running their own business. They have to think about their IR35 status, but the government is going to move that and make it the end client. Who's going to have to think about it. And this has resulted in lots of people being informed that they can no longer operate in this way, or that they have to go work via, what's known as an umbrella company or that essentially they have to pay tax like an employee, even though they're not getting any employee rights and they might feel they're not an employee, and this is causing a lot of distress.
Hayley Akins (05:27): Yeah, I think it is because in the industry I've heard a lot of, because sometimes we work with recruitment companies and stuff like that, and they're trying to encourage a lot of freelancers to join an umbrella company. Do you think this is the answer, or is there other things that we should be doing?
Andy Chamberlain (05:43): What the rules now do is they, we call them an end client, right? So this is the organization, which is engaging the individuals through some work they're often engaging the individual via their own limited company. The end client is now going to have to think, well, it does IR35 apply or not, and if it does apply, they have to ensure that tax is deducted at source from payments. In other words, like an employee. So if you're an employee, you'll know that when you get paid, you've already paid all your tax. It just gets taken off before you get the money. What IR35 does is it gives that same treatment to self-employed people or people who are limited company contractors. And so the end clients may not want to put these people into their own payroll because they might not have the software to do it. And they may not be there with them for very long. So they're inviting them or forcing them or saying to them, you can't work here unless you go and find a payroll company, which is going to make that tax deduction. So we'll, so the end client will pay the payroll company and the payroll company will do the tax deductions and then pay the individual as if they were an employee. But they're not an employee for employment rights, but that's why so many people are being pushed into the umbrella company.
Hayley Akins (07:02): Yeah. That makes sense. Do you think it's more beneficial for the companies like the end client than the freelancers themselves? I guess
Andy Chamberlain (07:13): It's not really beneficial for anybody apart from maybe the government who are hoping to gain a lot more tax from this measure, but I have some doubts over whether they actually achieve that myself, particularly given that we have currently a major economic shock that seems to be setting in around the Corona virus, but that's a whole nother podcast imagine. So sticking, sticking to our 35 matters, the, the, the end client is terrified because if they say that IR35 does not apply, then they can carry on paying the worker or the contractor gross just like they did before. But if HMRC come along at a later date and say, actually, you didn't did that. The tax that you should have done, because we think IR35 applies. And we can probably go into that a bit. If you like over, when it applies, it doesn't, but suffice to say is extremely complicated and no one really understands it.
Andy Chamberlain (08:09): Then they will be held liable by HMRC because they didn't deduct that tax. So what they're saying is it's safer if we just put everyone inside IR35, which they shouldn't do, but that is what's happening in some cases. And then they realise that if they put people inside IR35, that means that they have to pay. If they were to do it by their own payroll, they would have to pay employer's, national insurance contributions, which is 13.8% on top of whatever you pay the individual. They don't want to do that. So they just shove it down to the umbrella company. Now the umbrella company doesn't want to pay it either because they're operating on about a 2% margin. So they say to the individual, we need to reduce your day rate by a certain amount so that we can pay the employer's national insurance contributions.
Andy Chamberlain (08:59): So in a way, the use of the umbrella company, I mean, partly it's just a practical, easy thing to do. It's like, okay, I've got to get you paying to, I've got to deduct tax now. And I can't be bothered to do it on my own payroll software. So I'll just go and do it under an umbrella. But it's also a neat way of saying we don't want to have to pay any more for your services than we do. Now. There's going to be all this extra tax that needs to be paid. But if we push you into that umbrella, they'll sort all that out and they'll reduce your rate. So we don't have to have that conversation with you and you will end up paying a lot more tax than you were before.
Hayley Akins (09:33): Yeah, that makes sense. So I think my question would be around, is it, this, does it affect us the same way? If, if we have limited companies versus if we're a sole trader as a freelance?
Andy Chamberlain (09:45): Yeah. So IR35 only applies where there's a limited company. It doesn't apply to sole traders. However, there's a lot of confusion around this, partly because there are preexisting rules for sole traders, which mean the end clients can be held liable if the proper tax hasn't been paid on a on a sole trader relationship. And that is why over the last 20 years or more, so many companies started to say, look, if you want to come and work for us as self-employed, you've got to have your own limited company, because that limited company formed a kind of protective bubble for the end client. It meant that any kind of tax compliance risk was held within that limited company. And now the government is saying, they're going to change that and move your 35 risks further up the chain. It's a really challenging thing to have to get your head around, but you sort of do want to try and get your head around it as much as possible. So yeah, so sole traders aren't affected by IR35, but there are preexisting rules, which are a bit similar. Anyway, if you're a sole trader and your end client says to you, Oh no, these five rules are come in. So now you got that. You can turn around and say, I've got nothing to do with IR35 I'm a sole trader. And you'd be completely correct to say that.
Hayley Akins (11:07): Yeah, because in the past I've had clients say, you know, like, Oh, can you be, you know, be under a limited company and stuff like that because of all the, the sole trader kind of role. So I guess we could say that, but then like you're saying technically there might still be the tax rules that apply there. Like, I don't like, it doesn't seem like it is just that's the answer. Every freelancer should just be a sole trader, right?
Andy Chamberlain (11:34): No, because I mean, if an end client is, as I said before, end clients have always, actually been a little bit nervous about engaging sole traders or paying some traders because it leaves them open to potentially an investigation over tax. And it also leaves them more open to claims over employment rights from the individual. So, you know, as a self-employed person, for example, you don't have unfair dismissal rights, but if you're a sole trader and you are let go by a client and you feel aggrieved that the way you've been treated, you can go to an employment tribunal and make the claim will. In fact, you were an employee, you know, that the true status of that arrangement was one of employment. And that therefore you had those rights that is much, much, much harder for an individual to do if they're supplying services via their own limited company, because it is their own limited company who is liable for any employment rights that they might have. Do you see what I mean? So it's like a protective shield for end clients. That's why they like it. But now this IR35 changes come in and it's kind of removed some of that protection, not around employment rights though, but it has around employment status.
Hayley Akins (12:43): I was just thinking about, you know, the listeners and the audience listening to this and thinking, well, okay, shall I just, you know, close down my limited company and become a sole trader. Then
Andy Chamberlain (12:54): If you think that your client would be more prepared to work with you on a genuinely self-employed basis, if you did that, then I think that that could well be worth doing. And if you chat to a few people inside your industry and get a feel for what clients are doing, then that could work out as a solution for you. I mean, it's a bit simple being a sole trader. There's a few less sort of forms to fill in things, but it also does remove some of the advantages of being in a limited company. For example, if you're in a limited company, you have the benefit of the protection of personal assets. In other words, if you do something wrong on a job and it costs a project you're working on it, it costs your client, lots of money. They could Sue you or come after you hold you liable for that damage. But they can only go after what's in your company. They can't take your own personal assets. In other words, your house or your car, whatever it might be. If you're a sole trader, you don't have that. There's no, there's less separation between your business and you as a person. And so that's one big area. That's one big advantage to having a limited company for many self-employed people that you don't get, if you're a sole trader.
Hayley Akins (14:12): Yeah. So do you want to talk about a bit like the fundamental rules for being inside our I 35 and outside our I 35? Just so people get a sense of like what HMRC would be looking at.
Andy Chamberlain (14:26): So it's all built on case law, right? So the way that we work, there is no hard and fast rule that says, well, if you wear a blue shirt to work, then you're caught by 45 minutes. If you wear a pink shirt, you're not, unfortunately the way that you look at it, as you look at the case store, and there's a seminal case, which all the judges refer back to, which is known as ready-mix concrete, which took place in 1968. And it set out the three or four main characteristics of how we determine what is a employment relationship. What does it look like? And they said that you need to have for employment to exist. You need to have each of the following personal service. In other words, one individual is required to do the work themselves. They cannot send a substitute. This is still a very key feature.
Andy Chamberlain (15:12): And it's why in a lot of contracts, you might see that you have a right to send a substitute is a good thing to have that in your contract, because it demonstrates that IR35 does not apply, but HMRC have tried to diminish the importance of that. By saying that you must have an unfettered, right. Substitute. In other words, you don't get to say, go up to your client and say, look, is it okay if rather than me next week, I'm going to send Susan. You have to say you know, I'm sending Susan, that's it. You just, you just have to deal with it. The way that I sometimes explain this is I talk about in our office, we have a water cooler and we have a contract with some company to come in and you know, stuff about it and service it or whatever it is that they do.
Andy Chamberlain (15:57): And we don't care if Steve comes or Bob, we don't mind. Yeah. They have a right. The water cooler company has a right to send whoever it wants to do the work. As long as the work is done, we're happy and we'll pay. It should be a bit similar if you work for your own limited company in any industry that you should be saying, no, you, you, you, you and client have an arrangement with my company for a certain set of services to be provided. And it shouldn't matter whether I personally provide them or whether it's somebody else. That's what the personal service test is all about. In reality, of course, it doesn't always work that way. Lots of clients say, no, no, no, no, no. We want you, you know, you, we, we've got used to you working here. You can't send Susan and next week it's got to be you.
Andy Chamberlain (16:41): That's what that's really what the personal service test all comes down to. And the stronger, right. You have to send a substitute. The more likely it is that you can just bat away in our 35 claim. The next one is mutuality of obligation, which is the most complex out of all of them. And in fact, it's disputed, but generally speaking, one way to try and understand it is, is the end client obliged to provide the worker with work, to do, and is the worker obliged to accept that work? You do it. So in other words if say let's take an example. Let's say there's a big bank. And half the people in the room are employees and the other half are self-employed contractors and all the systems go down. So no one can do any work. The contractors should be set at home and not paid for half a day.
Andy Chamberlain (17:32): Yeah. There's where we can't get any more work. Now you guys go home and we won't pay you for the rest of the day. The employees are expected to stay behind and they do some filing or something, and they will be paid to them because the end client is obliged to provide them with work. And the employees are provided to stay obliged, to stay on and do it in a way that contractors are it's however, a very disputed area, mutality obligation and HMRC take the view, which is an extreme view that if there is a contract in place, there are mutual obligations on the parties to do something for the other. In other words, you do something for me and I'll pay you yeah. That they say that to mutual obligations. The courts largely don't agree with that interpretation. So it's a disputed area.
Andy Chamberlain (18:17): And the last one is control a little bit easier to understand this one, basically how much control does the individual have over the work that they're doing? And this is I think an interesting one for your audience to consider. Cause I would imagine that the work that they do is quite skilled and that there will be that when they're engaged to do that work, they can't really be controlled in how they do that because no one else knows how to do what they do. They have a specific set of skills that to me, demonstrates that control does not exist. There is a lack of control. In other words, a lack of control that the end client is exerting onto the worker. Whereas if they were employees then climb and say, no, no, no, no, no, no. I'm going to control your work because you're my employee.
Andy Chamberlain (19:01): But as a self-employed specialist, you have the control. Unfortunately, there again, HMRC take the view. Well, if it's very highly skilled work, then that kind of neutralizes the control test. In other words, we just won't count it because you know, you ha if it's so highly skilled and obviously it can't be controlled, we think, again, that, that is a ludicrous interpretation of the case law. So you can see how all these things get twisted up. So if there's any one of those three that you can prove doesn't exist in a relationship. So if there is not a requirement of personal service, if there are not sufficient mutual obligations, and if there is not a sufficient degree of control exerted by the end client onto the worker, then any one of those three, our 35 doesn't apply.
Hayley Akins (19:50): It kind of gets me thinking about then because how it usually works in our industry, I guess a lot of the recruitment companies and maybe like ad agencies and stuff like that are freaking out because, you know, they're more people are going in-house and maybe they're working on their machines and stuff like that. But then there's another side of the industry where people are serving more direct clients. So that would be more like a freelancer to a brand. Let's say who doesn't know anything about animation and maybe, you know, kind of people who are more going down that direct client route might be a little bit safer in that respect. I don't know this, just the kind of things that are popping up in my mind.
Andy Chamberlain (20:32): It does complicate it. And often many arrangements do have agencies involved. It shouldn't really affect the underlying IR35 status. It shouldn't, but I think it very often does because of various reasons way the legislation works. But it should just come back to those three things is personal service required. Is there control? Is there mutual obligations? If there's one of those things aren't if the answer is that any one of those is no, then IR35 should not apply that that's how it should work, but it doesn't always work that way.
Hayley Akins (21:07): You know, people are trying to navigate this right now with their clients. What can we try and do you know, is it having more conversations about this kind of stuff with our clients? What are, should we, should we be doing basically to kind of help this situation, I guess?
Andy Chamberlain (21:22): Well, I think talk to your client early on and say look, I'm, you know, if you believe that RI35 doesn't apply, you might want to write down the reasons why you think it doesn't apply. I mean, you can get, if you have a contract and we would always recommend that you should have a contract, then you can get that contract independently reviewed for IR35. You can do that via IPSE, but there know other contract review services are available. And it might cost you something between a hundred and 150 quid or something. But you you can get that back and you can say, look, I've had this checked out. And if it says that IR35 doesn't apply, you can give that to the client and say, look, I thought, if it doesn't apply here now in practice, it's not just about the written contract.
Andy Chamberlain (22:07): It's about the real working practices. So you might want to think of reasons why you get treated, not like an employee. That's really what this is all about. That's the simplest way to think of this. So are there things that distinguish you from employees with it inside the organization that you're currently working with? If there are point those out to the end client, there's also something called the check employment status for tax tool or cest tool, which is a government tool, which we're, up-sale very skeptical of, but you could have a look at it. It's anonymous. So no one will know. And you go in there, you answer a series of questions and it churns out a thing saying I IR35 does apply. IR35 does not apply. Or maybe it can't tell some, it does that in about 15% of cases, because even this cause it's so complicated that if you can go in there and answer it as honestly as you can, and it gives you the answer that you want print off the PDF that you get at the end of it and show it to your client and say, look, I've done this.
Andy Chamberlain (23:08): You know, it may well be worth you building that case before your client talks to you about it. And just so you're ready to go and say, Oh yeah, I've checked all this out. I think, you know, here's the evidence and it just then gives them pause for thought, in case they're thinking of saying, well, I've got no idea how will this work? So we're just going to Chuck everyone inside our 35, which is what's happening.
Hayley Akins (23:30): Yeah. That makes sense. I guess the problem might be, is, cause obviously we're working with lots of different clients and trying to get new clients all the time. Do you recommend like having, you know, the contracts in place and having these determinations statements like to give to our clients? I was just thinking about it. Cause it's quite complicated, isn't it? Because actually there's a, there's something called a status determination statement, which they should be giving you.
Andy Chamberlain (23:56): Yeah, that's correct. Yeah. It might be worth as quickly mentioning the small company exemption here too, just before this is that okay. So these rules that I'm talking about and this change, the end clients are going to have to think about IR35 status and they're going to have to consider all this stuff like personal service and meet relative obligation and control. They will only have to do that if they are medium or large in size, small companies do not have to do that. If your end client is small, then you retain the liability and responsibility, just like you always have. How do we know if they're small? What a small company has to make has to meet two of the following three criteria. So it's less than or equal to 50 employees, less than or equal to 10.2 million turnover, less than or equal to 5.1 million on the balance sheet.
Andy Chamberlain (24:50): So if you meet two of those as an end client, then you're small. You don't have to worry about any of this. So if your client is small, they shouldn't be talking to you about IR35 unless you ask them, you can ask them and say, if they use small, is that why you haven't spoken to me about it? And then they have 45 days in which to respond to you to confirm that indeed they ask and that you have the responsibility and that you may therefore want to do things like Hudson tax, investigation, insurance in place, which again, others are available, but that comes with it, say membership. So you can have a look at, say, have a look at our membership. See if that appeals to you. Because one day HMRC might knock on your door and say, Hey, why didn't you pay all this extra tax under our 35 for the last six years?
Andy Chamberlain (25:35): And also you asked me about the SDS or the status determination statements. So this is kind of a new thing. That's become into this new stage of the the legislation. I mean the underlying rules for our 45 that we've discussed, but how we decided that hasn't changed. But this new changes moving the responsibility to their end clients and the agencies to, if there are, if they are in a chain, the SDS is now, what they have to do is simply a, all an SDS is, is a document, which says, this is what the IR35status is. We've looked at it and we've decided IR35 applies or it doesn't. It must include the reasons why they've come to that decision. They can't just say it. They have to say why, and they must take reasonable care and coming to that decision, that's what they say.
Andy Chamberlain (26:22): There's cool. This term, reasonable care is actually in the legislation. If it doesn't do one of the, any one of those three things, it must do all three of those things. Otherwise it is not an SDS and the client has therefore not discharge its obligations under the legislation. So the reasonable care thing is kind of interesting because what it's trying do is saying you can't just say everyone's caught by 35. You know, you have to really think about each individual engagement. Otherwise, if you don't do the SDS, you could become liable automatically for all the tax. Right? However, the problem is, is we've been arguing is if the end client just doesn't take reasonable care and just says, IR35 applies to everyone and that properly filters down through the supply chain, as it's supposed to, then the tax will be deducted. So there is no liability. So is there a bit of a catch 22? Really, if you follow me on that one safe, we've asked for that to be strengthened. And of course the government is not really, we don't a lot of lobby against this. We are deeply opposed to our 35 and we are deeply opposed to this change. That's coming in in April as well as just saying you shouldn't be doing it government. We've also tried to point out where the individual floors are in the legislation, including this one, but they seem to be carrying on regardless. Unfortunately.
Hayley Akins (27:38): Yeah, that makes sense. Cause I think that's what people are doing. Like when we were talking about the umbrella company and stuff like that, they're just saying, Oh, we can't be bothered with this. And it's too hard because I guess it is hard. If you're a big company, you hire a lot of contractors. You're getting a different contractor in like every day. Like how you supposed to like do this? Every single one, you know, can be tricky. So yeah,
Andy Chamberlain (28:00): It's really hard, you know, and I don't really blame the clients too much. Although it's damaging our members when the clients just say, IR35 applies or even we're seeing in some sectors saying, we're just not going to work with contractors anymore. We're not going to even do an, IR35 statement or States termination. We're just going to end all those arrangements. We just don't work with you. If you have contracts, that's it can't work, which is terrible. But I understand because the IR35 legislation is appalling legislation and no one understands it and everyone's terrified, that HMRC might hold them liable for a huge tax bill. So it's really not surprising that so many clients are taking this extreme approach to compliance of it, which is we told the government that this would happen and they didn't listen and now it is happening. So it's frustrating, but I can understand it from the client's point of view,
Hayley Akins (28:55): I guess like another question that I have, because we at mation hatch, we have like contract templates for motion designers and stuff. Where, of, of the opinion that it's good to have a contract and, you know, providing your client with statement of work and stuff like that. Do you think this kind of stuff helps? I think we mentioned before the it could help, but obviously like getting like a solicitor or someone like that to check your contracts is always good too. Just wanted to put that out there as well, but just having like a statement of work and like you engaging the client with your own contract, do you think that is going to help a bit as well?
Andy Chamberlain (29:29): Yes. So statement of work is I think it's part of a possible solution tool there. So statement of work is a type of contract basically. And what it tends to mean is that it will set out clearly what the project is. It may have set deliverables that set milestones of the project that you have to achieve. And very often payment will be on delivery of those milestones. That's not totally essential, but that's typically what you might find in a statement of work contracts. If you have a contract like that, it is very hard. I think, to make the case that IR35 possibly apply to that kind of arrangement, but the working practices have to match what's in the written contract. You can't just think, Oh, I'll just put seven to work contracts in and then we'll carry on. Like we were before basically acting like employees, you know, then I will apply. But a statement of work contracts, if it's followed properly could be a very, I think a very, very helpful delineated demonstrate that IR35 does not apply.
Hayley Akins (30:28): Yeah. So we had like a couple of questions from people in our audience. I'd like to ask you a few of those before we wrap it up. One person said that they spoke to two accountants and they told them that they don't have to worry about IR35 because they have many different clients. And her question was, she didn't think it was that simple, which it sounds like it isn't,
Andy Chamberlain (30:51): It's not that simple. It's an interesting one though. So generally speaking, I thought if I've worked on an engagement by engagement basis and what it means is that you could have two concurrent contracts going on with two different clients and one of them could be caught way off, but the other one might not be. Yeah. So no matter how many clients you have, what we're really looking at is what is the relationship like with the each individual client? It is the engagement or the relationship, which is not the business. It's not you an individual isn't caught by IR35, but one of their engagements or more might be so having lots of clients, therefore doesn't technically get you around because you could, some of those clients, some of those relationships could be caught by us. However, there has been a couple of cases recently where it would seem to sort of diminish that idea.
Andy Chamberlain (31:46): So I don't know if you know who Kay Adams is, but she is best known as one of the loose women on the TV show, loose women. She had a TV show with the BBC, which was not loose women's ITV. She had a TV show, HMRC that's tribunal. They said, Oh, 35 applies to the, to that engagement that she had with the BBC. But the tribunal decided that because she had this other engagement and others beyond that with ITV, that she was clearly in business on her own account. So the fact that she had lots of clients was deemed to be by that particular tribunal really important part of the determining factor. I do think that as a general rule, if you've got lots and lots of different clients, you will be outside of IRR 35, it becomes harder to establish that any one of those is likely to be something, but just be careful, you could be caught out.
Hayley Akins (32:43): Yeah. Someone else is asking about whether patients designers qualify into temporary film work as exemptions. I don't really know anything about that. And I don't know whether you do.
Andy Chamberlain (32:53): I don't know anything about that, but I do know about something called the film TV and projection guidelines, which came out at the end, which were updated at the end of 2019. And this is unique to the film and TV industries. There's nothing, there's no one else that has something like this. And what those guidelines say is that there are certain types of role within film and TV that are just likely to be self-employed. And there are certain types of role, which are, which are not so acceptable for them to be self-employed. Now a lot of this stuff is about behind the camera stuff. So a lot of it is about production camera, man, lighting, you know, all those kinds of people. And it's worth having a look in there to see what it says about your specific role. And I'm not sure if it's in there, but if it is, there may be some guides in there cause H M R C have backed up those guidelines. In other words, what they're saying is, is if it's in there and it says, for example, when I don't know whether it does, by the way that if you're a cinematographer, then you're self employed and that's fine, then that's a pretty good indication that you'd have to worry about IR35.
Hayley Akins (34:02): Okay, that's good to know. We'll check that out and we'll put it in the show notes and stuff, and everyone can have a look at that as well. I think that's good. Cause I didn't have any idea about us. So that's great. If someone asks, do you think there are any lessons that we can learn from, you know, the private sector from 2017? Like when, cause obviously this applied to the public sector,
Andy Chamberlain (34:23): Right? So yeah, I mean, I hadn't mentioned that hello, but these, this change to our 35 where they took the responsibility away from the individual contractors and moving up the supply chain to the end client, this happened in the public sector in 2017 and it was carnage because all the public sector organizations did, the blanket assessments, big problems in the NHS reported in the times, a bunch of locum doctors actually tried to take well they launched a pre-action protocol for a judicial review against NHS improvement, which is like the overseeing body for all the NHS trusts. So lots of big legal problems, lots of people storming out huge problems at TFL. There were delays the project because of it. I think that the lesson, what I hope the lesson is, is for the clients to say, you can't just put everyone inside IR35, it doesn't work like that.
Andy Chamberlain (35:15): You've really got to think about this and help people. Because if you say the iFunny five applies, it will mean that they will probably have to pay an awful lot more tax than they were paying. So if you're right in your assessment, well, maybe that's fine, but what if you're not right? You're asking someone to pay a huge amount of extra tax that they shouldn't actually paying. So this is going to, you know, this is going to cause problems and private sector companies need to consider the rules very carefully and work out where they apply and where they don't apply.
Hayley Akins (35:50): Yeah, definitely. I think someone else was talking about, you know, approached companies and said, they think it's outside of IR35 and then the company is kind of disagreed and then just kind of re posted job posts and stuff like that. And I think people are worried and they feel like, because people are going to take this blanket ban thing that no one's going to get any work, basically, because you know, if we're going around saying, no, it doesn't apply, blah, blah, blah. And I dunno just what the best kind of approach is. I mean, we've talked about quite a few different things that you could do. So I think that's really good.
Andy Chamberlain (36:25): Yeah. But I mean, the point you raised is the worry isn't it is that you're not going to get worse. You know, as we mentioned before, as we record this, there is reports that the Coronavirus is going to basically shut down various bits of our economy and who's going to take the full blood lab. Well self-employed people, right? So because they don't have the same protection of income. So you've now got this other problem. And I do half wonder whether the government might actually reconsider putting this into the finance bill, considering the context that we're in, but there's no indication that they will do that. So yeah, I thought you five is a work killer. It is killing work opportunities. And this is another problem with it. Unfortunately, contractors, yes. You could take the, the as you say, take the sort of righteous view and say, Oh, 35 doesn't apply. I won't accept it and find that you can't get any work anywhere. So it's very, very difficult. And you might well be right by the way, but you still going to be in a difficult situation.
Hayley Akins (37:24): Yeah. So as we're wrapping this up soon, do, can we just like go over some of the things that we have highlighted in this episode about, you know, things that we can kind of control ourselves, I guess.
Andy Chamberlain (37:37): So look, I thought IR35 doesn't apply. If you are a sole trader, if you don't have your own limited company, IR35 does not apply. So if your client says to you, Oh, well I say your five means you've got to go in the payroll. No, it doesn't because I'm a sole trader. Now they might say, well, as a sole trader, there's actually some preexisting rules that we're worried about. So we still would have to go to the payroll, but they might not really know that because lots of people, there's a lot of confusion around this. So you, if you have the knowledge, then that knowledge is power, right? So if you're a sole trader are 35 does not apply. That's your message to any client, the choice to say to you that you need to go on the payroll. The second thing is that have a look at your contracts and possibly get an independent, your review, have a think about your working relationship and think about all the ways in which you are not an employee.
Andy Chamberlain (38:25): Write those down and be ready with the arguments. If your client says to you, look, I think IR35 applies is very good to have a little sort of folder of evidence points to no, this is a self-employed relationship that will help hopefully to convince them to put you outside of our faith. And finally, if your client is small, remember they don't have to do so if you're working for a small client like that and quite what it's like in your industry and how typical that is. But if you are working for a small production company or something, and they are the end client, that's where it will get difficult because they might be working for paramount Fox or whatever. So, you know, I'm sure it gets complicated if they are deemed to be the end client and they're small and they don't have to do it.
Andy Chamberlain (39:10): So think about the clients who are working with, you know, can you find work with small clients if you're finding it too difficult to find outside of our, your five engagements with those larger companies, finally, just sort of maybe have a look at some of the explainers that you can find on the web, around the the case law on this. It might help you to understand whether IR35 does apply or not. There is a complex world and HMRC understand that they're constantly losing tribunals. So there's no reason why anyone else should understand that, unfortunately, but they do expect us all to these days. And having looked at that film, TV and production guidelines as well, and see if what you do matches anything in there, there could be something in there which might help you out.
Hayley Akins (39:52): Yeah, that's great. So do you want to tell the audience more about where they can find out more R I 35 on Ipsy and more help if they need it as well?
Andy Chamberlain (40:03): So ipse.co.uk, on our homepage, there's an IR35 hub tab and you go in there and we've got lots of new guidance in there, all about how the rules work. You can go in there and take a look at it. There are there is a bit of video content. Well, there's a house of Lords inquiry going on right now into our feet five, which I gave evidence to about two or three weeks ago, which I think you can find that on new. So you can see me waffling on about IR35, some more. If you haven't had enough of this, you can get some more of it. We will do some webinars. We're going to, we did a webinar last week or week four. We're going to keep doing some webinars as well. Keep checking the upstate website. I don't think you have to be a member to get into our webinars. I don't think so. Yeah. Keep checking the IPSE website for sort of updates.
Hayley Akins (40:52): Yeah. Great. That's this has been really great and it's definitely cleared up a bit more in my mind as well. So I really appreciate it. Thanks so much for coming on the show. Thanks for having me. Thanks again to Andy for coming on the show, you can find all the links that we mentioned at motionhatch.com/84, as mentioned in the intro. If you would like to join our free motion designer client challenge then please go to motion, hatch.com/challenge to sign up. Thanks again for listening. I appreciate you. See ya.
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