Compliance & Tax

IR35 - All freelance business structures will be accommodated

Freelance Business Structures Accommodated Under IR35 Rules
Shib Mathew
Shib Mathew
March 18, 2021
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IR35 is coming - regardless of what I think about it or its timing as we all try and find the light at the end of the COVID tunnel. 22,000 people agree with me on the last point. But the UK Government has made it clear that there will be no further delays, so it's in every freelancer’s interest to be prepared. During this post, I’m going to call out specific points (NOTE X) that are not only worth highlighting, but also crucial to understand in a post IR35 world.

Since its delay last year, we've been busy. We’ve been tailoring the YunoJuno platform to ensure we can be as flexible as possible for our freelancer community in how they want to work and the types of business structures they want to operate in once IR35 is implemented.

From 6th April, the responsibility (and the liability) of classifying whether a project is Inside or Outside falls to the hiring client. It’s been this way in the public sector for a number of years already but this date represents when the rules apply to companies in the private sector as well. 
Classification is based on each contract, not an individual. A client is required to classify whether a CONTRACT is inside or outside based on what they know the working practices will be of an individual when on that project/assignment. It is NOT about you as a freelancer, how you are structured or if you bring your own equipment to a job.


You might have arrived at this blog post from our community-wide email so apologies for the repetition. But we want to make it clear - whichever way you as a freelancer choose to operate in a post IR35 world, we’ve got you covered.

Want to operate as a PSC (Limited Co.)? OK. We have set up a partnership with Giant Business Connect to enable PSC freelancers the ability to take an inside contract and not have to change their business structure.

Want to apply your craft as a Sole Trader (ST)? OK. Although ST's aren’t really in the IR35 world.

Prefer to operate under an Umbrella Company? You guessed it - this is OK too.

It’s also important to remember that within an IR35 world post April 6th, there are two key decision makers:

1. The Client. They will be obligated by law to determine whether a contract is inside or outside IR35.

2. You, the freelancer. You get to decide whether you want to accept an Inside or Outside IR35 contract. If a client deems a project outside IR35, then nothing changes. If you're a PSC, you get paid your gross amount and you are responsible for your own tax obligations. But if a client deems a project 'inside', you still have the choice to accept the booking or not. The component that is changing is that payments under an 'Inside IR35' contract will need to be run differently. This blog post details this further.

Every freelancer has the right to challenge an inside/outside classification (known as a Status Determination Statement (SDS)). Once a freelancer challenges an SDS, the client then reviews that challenge and makes the final decision to keep the existing classification or change. But even if a client maintains their original classification, you still have the choice to accept the booking or not.

So what are the possible freelancer structures and scenarios post April 6th?

There are basically four scenarios available:

1. You're a PSC and a project is deemed outside IR35.

2. You're a PSC and a project is deemed inside IR35.

3. You're a freelancer operating your services under an Umbrella Company.

4. You’re a freelancer operating your services as a Sole Trader.

For each of these scenarios, freelancers and clients require a compliant payment path in order for HMRC to be satisfied that all appropriate tax obligations are met. YunoJuno is able to provide this so you can continue to work in the way that best suits you. 

Let's go over each of the above scenarios in a little more detail.

Scenario 1: You're a PSC and a project is deemed outside IR35.

This is relatively the easiest of the scenarios as it's the same as it is today (pre 6th April) - i.e. a PSC is paid their gross fee and they are responsible for the management and payment of their own tax obligations. The client has officially stated that the project in question is not a 'disguised employee' (HMRC terminology - not ours) and they have the SDS to stand by it. 

So in this scenario, if you're a PSC, nothing changes.

Scenario 2: You're a PSC and a project is deemed inside IR35.

Here is when things change in regards to how tax obligations are met and how payments are processed. 

Because the client has deemed a contract as inside (with an accompanying SDS), they are stating that the working practices on the ground are employee-like. Therefore, there needs to be a payment path and vehicle that calculates and administers the correct tax obligation of you, the freelancer. 

Typically, for regular employees within a business, this is done by their employer and PAYE. So how does a freelancer accomplish this whilst maintaining their freedom and independence? This is where the concept of a Deemed Employer comes in. A Deemed Employer is someone that acts as your employer for a period of time and stands in-between you and HRMC to ensure all the appropriate tax obligations are met for that particular project.

We have chosen Giant Business Connect as this Deemed Employer. They are now our official partner and they will administer all the payments in Scenario 2, and we will send you a more detailed email on how this process will work in the next week.  

NOTE 4.  
There is no getting around this. If you are a PSC and want to take an inside IR35 contract via your PSC then you will need a Deemed Employer. This Deemed Employer, as your 'employer' takes ALL the responsibility of withholding all the correct taxes from your gross fee for that project. Importantly, you are not required to change your business structure as a PSC. You can remain as such since you might want to take a contract that is outside IR35 in the future.

Scenario 3: You're a freelancer operating your services under an Umbrella Company.

Many freelancers use an Umbrella Company with the same motivation as the Deemed Employer. The main difference is that an Umbrella Co. operates ALL of a freelancer's bookings in this way. 

So effectively, the Umbrella Co. is a freelancer's official employer for all their contracts and takes the responsibility for all tax obligations. The Umbrella Company then pays the freelancer after they do all the appropriate tax withholding. 

Scenario 4: You're a freelancer operating your services as a Sole Trader.

Sole Traders will also continue as they do today, however, they have similar hoops to jump through called Supervision, Direction and Control (SDC). For the purposes of this email however, I'm only focusing on freelancers who have the joy of IR35 to experience.

For both the Deemed Employer (Giant Business Connect) scenario as well as using Umbrella Companies, YunoJuno DOES NOT add a mark up to their costs - i.e. we do not make any money from these partners or a freelancer's choice. Our primary goal is to enable all YJ members to maintain as much choice as they can when it comes to which contracts they accept. There are some boundaries that all freelancers and companies will need to abide by (as stated above) but as far as we are concerned, you have the right to remain whatever business structure works for you and your freelance life. 

I am also pleased to state that we have agreed contractual terms with Giant Business Connect to ensure they follow our 14 day payment period. So the insertion of them into the ‘Inside ir35’ path will not be at the sacrifice of getting paid on time.  

Are there any exemptions to IR35?

The simple answer is yes. 

The more complicated answer is yes, but it depends on a company's size. Smaller clients are exempt from having to classify their projects as inside or out. You can find HMRC's criteria for small companies here

Two key things about the exemption that all freelancers should know:

1. Just because a company might be exempt from IR35 due to their size, this does not mean that IR35 (or its tax obligations) have disappeared. If a company is 'small' and is therefore exempt, the obligation falls back onto the freelancer to classify a potential project and determine if that project's working practices are 'employee like'. This is how it exists today even though this is not widely known.

2. 'Small company' definition includes parent companies. This means, if your client is a three-person startup (and has all the other characteristics of a 'small' company) but is owned by a parent company that is much larger, then it's whatever the parent company's big/small status is that's the deciding factor on size.

That was a lot to cover and I appreciate you getting through it. I have no doubt that we will all need some time to adjust to the new realities of IR35. But being prepared is the best chance we all have in making it as smooth as it can be. 

AspectEmployeeIndependent Contractor
Control and supervisionDirect control over how, when, and where to workFreedom to set their own schedules and methods
PaymentRegular wages; taxes withheld by employerPaid per project; responsible for their own taxes
BenefitsHealth insurance, retirment plans, paid leaveMust arrange their own benefits
TerminationOften requires notice and may include severanceCan usually be terminated at any time without benefits
Tools and equipmentProvided by the employerTypically use their own tools

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