IR35 Changes and the Concept of ‘Deemed Employees’

Companies and freelance contractors need to prepare for the proposed changes to IR35 and the concept of ‘Deemed Employees’

Deemed Employee
What is my status?

The changes were introduced into the Public Sector from April 2017. It is still a proposal, but the intention is to introduce the same rules to large companies in the Private Sector from April 2021. (was April 20 but delayed due to the Coronavirus)

Before I go into the proposed changes it is best to look at the definition of a large company, or the SME opt out. A large company is one that satisfies 2 of the following 3 criteria:

An annual turnover of more than £10.2m

A balance sheet with net assets over £5.1m

Over 50 full time equivalent employees

If a freelancer is assessed as a ‘deemed employee than the ’employer’ must withhold PAYE and NIC. Under the previous rules the freelancer’s personal service company would be liable for the PAYE and NIC.

It is therefore important that the ’employer’ of the freelancer carries out an assessment on the status of the freelancer. HMRC provides an online tool called CEST (Check Employment Status for Tax). Although it has some weaknesses it provide a process for carrying out the status review.

The Employer must keep full records of the assessment for all off-payroll workers.

Although freelancers can now be regarded as ‘Deemed Employees’, they are not entitled to the same contractual benefits of normal employees. For example holiday pay and maternity pay.

From the freelancers point of view, they will receive their remuneration net of PAYE and NIC (both employer and employee). They are also restricted on the range of expenditure that they can recover against their income, and the use of dividends to mitigate their tax liabilities. Really, they are employees without the normal employment benefits.

For many freelancers caught by the new IR35, they will need a significant increase in their hourly or daily rates to compensation for the detrimental tax position. In fact they may be better to become an employee.

The Helpful Bean Counter will keep you updated on the changes in employment status of freelancers and the new IR35 rules.

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