Understanding IR35: How It Impacts Creative Freelancers
As a creative freelancer in the UK, you’re no stranger to the joys and challenges of working in the ever-changing economy. However, there’s one aspect of the tax landscape that has gained significant attention in recent years and may have a direct impact on your freelance career – IR35. In this blog, we will provide an overview into what IR35 is and what it means for creative professionals like you.
What is IR35?
IR35, also known as the “off-payroll working rules,” is a set of tax regulations introduced by HM Revenue and Customs (HMRC) to ensure that individuals working through intermediary companies, such as personal service companies (PSCs) or limited companies, are paying the correct amount of tax and National Insurance Contributions (NICs). The goal of IR35 is to determine whether a freelancer or contractor should be considered an employee for tax purposes.
Understanding IR35 for Creative Freelancers
IR35 has significant implications for creative freelancers, as it may impact how you structure your business, the taxes you pay, and your overall take-home pay. Here’s what you need to know:
Determining Employment Status
IR35 revolves around the concept of “employment status.” HMRC assesses whether your working relationship with a client is akin to that of an employee or whether you genuinely operate as an independent contractor. Factors that influence this determination include:
- Control: Does the client dictate how, when, and where you work?
- Substitution: Can you send a substitute to perform the work required on your behalf?
- Mutuality of Obligation: Is there an obligation for the client to offer work, and for you to accept it?
- Financial Risk: Are you responsible for your own business expenses, or does the client cover them?
Inside IR35 vs. Outside IR35
If HMRC deems your work to be “inside IR35,” it means that your working relationship is akin to that of an employee. In such cases, your income from that client will be subject to income tax and NICs, like regular employment.
Alternatively, if you fall “outside IR35,” you are considered self-employed for tax purposes. This allows you to claim tax deductible expenses, which can often result in a more tax-efficient structure.
Impact on Take-Home Pay
The key concern for creative freelancers is how IR35 affects their take-home pay. If your contracts are assessed as “inside IR35,” you will likely have to pay more in income tax and NICs, reducing your net earnings. In contrast, “outside IR35” contracts often lead to higher take-home pay, hence why HMRC have strict guidelines in place to prevent this ‘tax avoidance’.
Since April 2021, the responsibility for determining IR35 status shifted from the contractor (you) to the client in the private sector. Public sector clients have had this responsibility since April 2017. It’s crucial to work closely with your clients to ensure they make the correct IR35 assessment.
If your client deems you to be under IR35 and you disagree with their decision, you have the right to appeal this with them. The client will then have 45 days to review their decision again.
IR35 in the Creative Industry
The creative industry may have a few challenges when it comes to IR35. This is because many creative roles involve short-term contracts, project-based work, and a need for a diverse skill set. As a creative professional, you may find yourself working with various clients simultaneously, each with different IR35 statuses.
IR35 is a complex tax regulation that can significantly impact the earnings and working practices of creative freelancers in the UK. It’s crucial for freelancers to have a clear understanding of their IR35 status for each client to ensure compliance with government requirements.
Navigating IR35 can be challenging, but with the right guidance and professional support from experts like AO Accountants, you can make informed decisions that benefit both your creative career and your financial well-being. If you have questions or concerns about IR35 and how it affects your freelance work, don’t hesitate to reach out to our experienced team at AO Accountants here.