As of April 6, 2021, new tax rules are in effect for certain self-employed individuals in the United Kingdom and some of their clients. IR35, also known as the Off-Payroll Working Rules, may apply when the freelancer operates under a personal services or similar company.
In general, IR35 shifts the responsibility of worker classification from self-employed individuals working through their own limited company to, in some cases, their clients. The goal of IR35 is to ensure that the appropriate taxes are paid.
Below is some general information, but please keep in mind it may not apply to you. To determine whether IR35 applies to you, it’s best to check with your own tax advisors.
In the UK, self-employed individuals can form a “Personal Services Company” or other, similar types of limited companies (for ease of reference, we will refer to all of these as “PSCs”). A PSC is a small business designed to allow a worker to provide services independently, and PSCs are subject to different taxes than workers who are not self-employed.
Before IR35, PSCs were responsible for determining whether a worker was an employee or independent contractor. Under the new law, certain UK clients need to make the decision instead. When we say “UK clients,” we mean a medium or large business that resides in or has a permanent establishment in the UK. Under the law, these businesses must determine whether a worker would be an employee of theirs if no PSC existed. If the client finds that the freelancer would be, they must withhold the appropriate tax themselves.
IR35 also states that if these clients are using an intermediary — such as Upwork — to process payments, the client can pass the obligation for withholding taxes to the intermediary. In short, this means the client must let us know, in writing, whether a freelancer is subject to taxation under IR35.
Whether you as a client are large enough, or have sufficient presence in the UK for IR35 to apply is up to you to determine. If IR35 does apply to you, every time you engage a freelancer through their PSC you should determine if they would be considered an employee if you worked with them directly. The government has provided this tool to help UK businesses make an employment status determination.
If the worker is classified as an independent contractor, you may continue with your project as usual on Upwork. If they would be considered an employee, you can email us at firstname.lastname@example.org to notify us of the designation and provide all details of the engagement. If you wish to continue with the project on Upwork, you will be required to use Upwork Payroll so the appropriate taxes will be withheld.
Unfortunately, we cannot provide specific tax advice — if you are having trouble determining your or your freelancers’ status under IR35, you should consult with your own advisors.
As a freelancer with a PSC , you may no longer be responsible for determining your worker status if IR35 applies to your client.
If your client meets certain criteria (see above), they are required to determine what your worker status would be if they had engaged you directly. Once they make that determination, they will present it to you in a Status Determination Statement (SDS). If you disagree with the SDS, you can discuss it with them.
If you are having trouble reaching an agreement with your client on the SDS, you should consult with your own advisors to make sure you get the best advice.