A guide to IR35 and being self-employed

IR35 is a relatively new legislation brought in by the Government to deal with businesses that are using freelancers who should really be on payroll, meaning they are avoiding paying the costs of having an onsite employee and all the taxes that go along with that. HMRC takes a very dim view of what they called “hidden employment”.

Just having a contract, working off site or only working part-time does not make you self-employed. So, HMRC looks at a combination of things such as:

• do you work at your own premises? 
• do you have the right to substitute someone else to do your work?
• do you use your own equipment? Use your own email address? Work under your own insurance cover? 
• do you have more than one/two clients? 
• does the workload vary? 
• is it clear you are a virtual assistant and not an employee to other people? (I.e. you don’t hold a titled role at the company).
• are you the only one who can do that work or can you pass the role to an associate should you be ill, on holiday or unavailable?

They take all these into consideration before deciding whether you are an employee or a subcontractor. If in doubt, use HMRC’s CEST tool to check your status:

https://www.gov.uk/guidance/check-employment-status-for-tax

Why does HMRC care about virtual assistants working continuously for clients? 

Because as an employee the client would be paying a lot more tax and national insurance contributions for you!

As a freelancer, you roughly pay 30% tax (20% income tax and 10% NI Class 2 & 4). As an employee, you’d pay 20% income tax + employer’s contributions of 15% plus paying into your pension (so the Government would have less liability for you in your old age).

Plus, employee wages are taxed and paid monthly, whereas freelancers account and pay their tax on the 31st of January, following the end of the tax year (currently – this will change with Making Tax Digital!). So freelancers pay less frequently too – which gives more opportunity for you to spend what you should have paid in tax! 

So if you are doing the same things week after week for your clients, charging a fixed amount retainer, there’s not a lot of difference between you and an employee – except that HMRC aren’t getting paid! Hence why they have an interest in these kinds of contracts. 

But retainers are good, right? 

Predictable cash flow is good – but if you are doing a great job, the client will want to work with you anyway. You don’t want them to feel they are paying you for nothing, and you want them to enjoy the flexibility of using a virtual assistant. You also have to decide what to do with unused hours and whether they can roll over into the next month… but what happens if they run up 20-40 hours of work and then want to use them all in one week? So you need to figure out a way of managing the retainer service delivery as well as making sure it doesn’t fall foul of the CEST rules. 

Okay, but what are HMRC really going to do? 

Well, all sorts of things can trigger a tax investigation – HMRC do tend to look closely at the virtual assistant industry and we have heard recently of several VAs that have been investigated. Virtual assistants using rolling retainers is one of those reasons to investigate. 

If you are a sole trader and are deemed by HMRC to be an employee, the client will have to pay the extra employer’s contributions. But as a limited company providing services, you would need to pay the extra fees (and the fine!). This is why some clients have been insisting on you being limited in order to work with you.