Freelancer with an IR35 headache – advice sought!

bpk101

Hi – i'm having trouble understanding IR35 implications as a freelancer. I'm hoping someone can offer some advice as i need to make a quick decision regarding an engagement i'm currently on. 

I've been working as a freelance (sole trader) designer for the past 6 years taking on engagements with design studios of varying sizes for projects lasting anywhere between a few days and many months. About 90% of the studios i work with would be classified as a 'small business' and therefore exempt from IR35. However my current engagement is with a large company who fall inside IR35. My current engagement with them is set to end this Friday April 2nd, however they now want to extend my booking until May 31st (an additional 9 weeks). Given - i believe - the IR35 changes take effect from April 6th they can longer accept invoices from me directly as a sole trader but instead offer two options...

1. Be paid a pro-rated annual salary on a Fixed Term Contract
2. Be paid a day rate via an Umbrella company (they only accept Parasol)

I need to let them know by Monday which option i'd prefer if i did agree to the extension. I'm completely confused by what implications either option would have on my freelance status going forwards and i'm unsure what to do... agree to the extension and choose an option? Or walk away and pick up another engagement with one of the 90% of smaller studios i find work with easily. 

Factors that are adding to my confusion include:

If i choose option 1 (FTC)
• I need to go back with a proposed annual salary, however the company has said it would have to equate to a lower day rate than i'm currently on as i would be entitled to company benefits (sick pay, pro rata holiday of 23 days, pension, insurances etc). However given the extension is only 9 weeks i can't really see how this is of any benefit to me aside from a couple of paid bank holidays and a couple of days paid annual leave. To be clear i am unwilling to agree the extension if i stand to take home a penny less than i currently do. If anything i'd want more to compensate for the additional admin this is causing. 
• I believe the NI and Tax deductions would be greater under an FTC than what i currently pay as a sole-trader (is this right?) However i don't know by how much and therefore how much to adjust my proposed salary to compensate. 

If i choose option 2 (umbrella company)
• I've heard the fees involved can be very high meaning any adjustments to my day rate to compensate will be unrealistic for the hiring company to accept.
• I'd in effect become an employee of the umbrella company – but given this extension is only 9 weeks and 90% of my engagements are with IR35 exempt businesses is becoming an employee of an umbrella company just a headache i could do without? What does it mean if after this potential extension ends (May 31st) i end up taking engagements with only smaller companies for the foreseeable future. Do i need to 'resign' from the umbrella before i can work for and invoice smaller companies directly? Or does all work moving forwards have to go through the umbrella company (and therefore susceptible to the associated fees and additional admin)?

To be honest, with all the (perceived) hassle involved i'm tempted to walk away but would like to get some advice in case all this is a lot simpler than i'm imagining.
I've also heard rumours that IR3d implications will be extended to impact 'small businesses' in the future so it might be something i can't avoid for long anyway.

My main criteria for deciding is; not to earn less than i am now, not to incur huge amounts of additional admin related to invoicing and annual self-assessment.

And advice gratefully received! 

deedee71

Have they performed the CEST test and deemed the engagement inside IR35?  It's not automatically inside just because they're a large company.  If they have deemed the role inside, the worst thing you can do is stay with them.  The whole time you've been there could be viewed by HMRC as inside, meaning you could face a hefty tax bill.  

I'll caveat the above with I've not heard of this happening to anyone after  the public sector changes in 2017. 
Unless they substantially up the day rate you're definitely going to take home less.  The umbrella will be around £22 a week.  You'll have both Ni's deducted - employer's is 13.8%.  You'll be taxed as if you'll be earning this amount for the whole year (obviously you'll get it back but you're wanting to minimise admin hassle)..  You even have a deduction for the apprenticeship levy (because the umbrella company has a payroll above a certain threshold so they pass it to you).

 My advise is to stick with the smaller companies for as long as you can.   I've not heard of it being extended to small companies but wouldn't be surprised. 

bpk101

deedee71 said:

Have they performed the CEST test and deemed the engagement inside IR35? 

Yes, i believe the CEST has been carried out already... the opening statement on the generic letter the company is now sending out to freelancers ahead of the new tax year states:

FREELANCER EMPLOYMENT STATUS
We need to determine the employment status of all freelancers who work with us – whether you’re a sole trader
or a limited company. Your employment status will establish whether or not you are exempt from PAYE (tax and
NICs). We use HMRC’s CEST tool to help us determine your status.
Even if you are working as a freelancer on a day rate, if you are deemed to be an ‘employee for tax purposes’, we
must operate PAYE on your behalf. If we don’t, this is known as ‘disguised employment’ and puts us at risk of a
fine from HMRC, as well as us owing backdated pay for tax/NICs for the duration of time you’ve worked with us.
We can’t operate PAYE for freelancers on day rates in-house, so this means we have two options of engaging you
going forward.

1. FIXED-TERM CONTRACT, or
2. via Parasol, an UMBRELLA COMPANY

deedee71 said:

I've not heard of this happening to anyone after the public sector changes in 2017. 

This is another source of confusion, i thought these changes hadn't actually come into effect yet but were finally doing so at the start of the new financial year? If not why am i only hearing so much about IR35 now?

deedee71 said:

I've not heard of it being extended to small companies but wouldn't be surprised. 

“We [the DBA] are warning our smaller business members to be aware of what might be coming in the next few years, while they aren’t affected now, we are expecting IR35 to be rolled out more extensively soon.”
https://www.designweek.co.uk/issues/3-9-february-2020/ir35-changes-advice/

deedee71

The changes (although the Government say it's not changes, just enforcement)  came in in 2017 in the public sector.  It's only just now being applied in the private sector, having been delayed a year because of confusion and covid.  It wouldn't surprise me if small companies are next on the hitlist.

I note the wording of the letter doesn't actually say they have done the test, only how you will be paid going forward.  Ask them to show you the determination.  And run your details through the test yourself and see if it comes out the same for future contracts.  I still wouldn't extend beyond this tax year.

DoctorStrange

It's unlikely you're actually inside IR35 from what you've said. 

In your shoes,  I'd run through CEST myself and see what the result is. If you're Outside IR35,  then share that with the client and let them know you're a proper, independent freelancer and that you won't work as a disguised employee.

BrassicWoman

If you haven't got the determination, there's no need to stress about it yet. They are just telling you what might happen. Run your own details through CEST and see what you get.

bpk101

Something I didn’t mention...
About 80% of my work comes direct from studios, 20% through an agency I use. This particular booking is through that agency. Essentially I’m still trading as a sole trader, I invoice the company I’m engaged by directly, they pay me directly and I then pay my own tax, just the agency charges the company their own fee separately. 

Does this change anything? 

BrassicWoman

Run your details through CEST.
You get a right of appeal on the determination and that's what you would have to do to appeal.
And it may stop you stressing about this.
The tool will give you the answers you seek....

JohnDorian

IR35 does not apply to a sole trader. It only applies to personal service companies.

DoctorStrange

JohnDorian said:

IR35 does not apply to a sole trader. It only applies to personal service companies.

This is true,  but the email from the client to the OP states they're testing both sole traders and LtdCo's.

Deciding not to work with Sole Traders/LtdCo's is a valid option to the client (even if the rules didn't intend that) and, to my eyes, the client is unsure of the rules. That's why I'd run through CEST, prove I'm "outside" and try to put it to bed without confusing the client further.

JohnDorian

CEST is fairly pointless as it isn’t really designed for a sole trader. 

If the client wants to stop engaging sole traders then it can do so but, as above, it’s fairly pointless as this has nothing to do with sole traders.