April this year sees the introduction of IR35 rules changes which potentially affect the income and tax position of thousands of freelancers with private sector clients.
Even if you *really* dislike dealing with your tax affairs, you need to pay attention to these IR35 changes, because your clients may have to make a determination on whether they treat you as an employee and add cost in terms of National Insurance, pension and sickness benefits. This applies whether you operate through your own Limited Company or you’re a sole trader and working for clients who fit the following criteria (wording taken from HMRC guidance)
The rules apply to all public sector clients and private sector companies that meet 2 or more of the following conditions:
- you have an annual turnover of more than £10.2 million
- you have a balance sheet total of more than £5.1 million
- you have more than 50 employees
Your client may decide that if that is what HMRC requires, then it’s more economic for them to put someone on the payroll instead of hiring you.
If that doesn’t get your attention, what will?
But freelancers shouldn’t see IR35 changes as all threat, there is an opportunity here as well to agree changes to your contract that benefit you and your client, by clarifying areas of working practice to both parties’ advantage that are currently grey areas both in and of themselves and in the way HMRC decides whether you are truly a self-employed freelancer or whether you are a disguised (or off-payroll) employee.
Before going any further, please note that THIS IS NOT LEGAL ADVICE. You should look carefully at the HMRC guidance and if in doubt seek advice from your accountant or lawyer. There is a LOT of confusion on this issue with many vocal critics of the way that HMRC is applying its tests.
A good source of information is the IPSE website and if you have a completed PR freelancer profile on The PR Cavalry platform, then you can get discounted membership of IPSE as a member of our Freelancer Buyers Club. A very good reason to update your profile if you haven’t already!
At the heart of whether your client and HMRC think you are an off pay-roll employees is the CEST tool. CEST stands for Check Employment Status For Tax
It’s a series of questions for you and your client that determine whether or not your contract with a client is truly one of self-employment or whether you should be treated as being an employee on the payroll.
In our opinion (along with many others) it is very badly designed and the nature of PR freelancing does not fit neatly into many of its tests and we fear that many clients will run the test and conclude wrongly that their contract with a freelancer falls outside what HMRC regard as being self-employment.
These grey areas are where the opportunity for freelancers (and clients) lies. By clarifying terms in a contract which compensate for the failure of the CEST test to be clear, both parties can feel more certain that the determination on whether a freelancer is or is not covered by IR35 becomes easier.
Can I Avoid IR35?
The short answer is no but it does not mean that you will be affected or that you cannot take steps to avoid being classified wrongly.
We’ll start by saying that one valuable way that freelancers can demonstrate that they are genuinely freelance (ie available for hire and actively seeking client assignments) is by marketing their skillsets and availability to potential clients by having a having their profile on The PR Cavalry. It alone is not a guarantee that HMRC will regard you as a freelancer, but in a dispute, evidence that you invest time and money in marketing your professional skills to a range of potential clients all adds up, along with having an up to date website for your Freelance PR practice.
The full list of questions in the CEST test are here and what follows are observations on each one and some suggestions where appropriate for how you can clarify terms of a contract which might otherwise be unclear to both parties when deciding whether someone is a freelancer or covered by IR35.
Substitution – CEST asks: ‘Does your client have the right to reject a substitute?’
It may be quite challenging for a PR freelancer to add the right to appoint a substitute to do the work, but providing that the conditions where substitution are very precise (ie the freelancer is unavoidably and unforeseeably not able to meet an immovable deadline and the grounds for rejecting a substitute are on the quality of work once delivered, rather than simply not liking the idea of a substitute on principle) then it is not hard to see how reasonable, terms can be agreed which avoid confusion beforehand and which allow the freelancer in an uncontrived way (see later) to answer NO to this question.
Paying the Substitute - CEST asks: ‘Would the worker have to pay their substitute?’ or ‘Would you have to pay your substitute?’
In order for the appointment of a substitute to fall outside IR35, the client would need to pay the substitute, not have the freelancer sub-contract the work
Office Holder - CEST asks ‘Will the worker be an ‘Office Holder’?
This requires a simple statement in the contract (if required at all) that the freelancer is not an office holder in the client’s organisation (eg board member, trustee etc)
Control - CEST asks ‘Does your client have the right to move you from the task you originally agreed to do?’
In order for the freelancer to answer NO it should be explicit in the contract that if the client asks the freelancer to move to another task or type of work then it will require a new contract.
The example HMRC gives is simple and clear:
Salina is an IT programmer recruited by a large business (the hirer) to lead development of a new online product. The large business has several ongoing, and distinct, products in development at the same time each with its own project team.
- If the hirer is free to move Salina to another project to meet its own project milestones or to another task within the same project, then for the purposes of CEST they control ‘what’ is done.
- If the hirer can move Salina under the same contract but only with her prior agreement, then for CEST purposes the worker must agree.
- If Salina can only be moved to another project by agreeing another contract with her then for CEST purposes it would require a new agreement.
Control Over How the Work is Done - CEST asks ‘Does your client have the right to decide how the work is done?’
There are two circumstances where the answer to this would be no and both are valuable protections to the freelancer to make clear in their contract with a client.
Firstly that although a client will almost certainly approve work to be placed in the public domain, how this is done should be the exclusive right of the freelancer, for example to determine who in the media to contact, how that contact is best made (phone pitch, email etc) and the wording of that contact. These are all natural and essential qualities of a PR programme and depend entirely on the skill and judgement of the freelancer and clarifying them in a contract is very much to the advantage of the freelancer.
The other circumstance in which the answer to the CEST question is no is where the freelancer is regarded as being an expert with greater knowledge of the process than the hirer. In HMRC’s words:
“Some workers are engaged for their specialist skill and judgement. The hirer may not even fully understand what they do. Where the nature of the profession, or the work, is such that it is not appropriate for the hirer to direct the way in which to the work is done, this would fall within the ‘Not relevant, it is highly skilled work’ category in CEST.”
Adding a sentence in the contract which acknowledges this specialist skill and judgement is required.
Control Over Working Hours - CEST asks ‘Does your client have the right to decide your working hours?’
Clearly, a contract which requires the freelancer to be full-time in the client’s offices cannot avoid the answer YES here, but for freelancers where some or all of the work is carried out remotely, then the opportunity to clarify is to the freelancer’s advantage.
The test is whether deadlines being met or working hours adhered to is the more important. HMRC states
“Where work must be completed by agreed deadlines and so long as that deadline is met the hirer does not control a worker’s hours, it would fall within the ‘No, the work is based on agreed deadlines’ category for CEST.”
Control Over Location of Work - CEST asks: ‘Does your client have the right to decide where you do the work?’
As above, a full or part-time role which must be carried out in the client’s offices or other pre-agreed location can only produce a YES to this question.
But again, clarifying in a contract where work can or has to be carried out (as the task dictates) can help to avoid a freelancer falling under IR35 because this question hasn’t been considered in the terms of the contract and adding a clause which responds to what HMRC says need not be controversial, given the precision on this.
“If the hirer can set the location where work must be completed as their priorities dictate, this would fall within the ‘Yes’ category for CEST.
If a worker can complete the work at any location of their choice, this would fall within the ‘No, the worker decides’ category for CEST.
Where the location is dictated by what task must be done, this would fall within the ‘No, the task sets the location’ category for CEST.
Where a worker can generally do some of the work at any location but will be expected to be in set locations at set times, this would fall within the ‘No, some work has to be done in an agreed locations and some can be the worker’s choice’ category for CEST.
An occasional ability to work from home would not fall within this category if the hirer could stop that request if it chose; e.g. flexible working arrangements. That would still fall within the ‘Yes’ category.”
Financial Risk - Equipment CEST asks ‘Will you have to buy equipment before your client pays you?’
This is unlikely to be an area where a PR freelancer could answer No. Laptops etc for general use are not covered.
Financial Risk – Vehicles CEST asks: ‘Will you have to fund any vehicle costs before your client pays you?’
Unlikely that a PR freelancer would ever be able to answer Yes to this
Financial Risk – Materials CEST asks: ‘Will you have to buy materials before your client pays you?’
This is a difficult choice. A programme of work may require you to buy goods and services from a third party (eg photography or venue hire) but the cash-flow risk of bearing these costs before being paid by your client may be intolerable.
Incidental costs, such as stationery are not covered.
Financial Risk – Other CEST asks: Will you have to fund any other costs before your client pays you?’
In our opinionfunding substantial and annual professional subscriptions such as media databases or journalist enquiry services which have no use to the freelancer other than to enable them to do a job for a variety of clients is a clear financial risk.
It might not require you to amend your contract (other than to make it clear that this is something that you own and their content cannot be shared) but evidence of the existence of that risk enables a freelancer to answer YES here and thus contributes to an overall picture that the freelancer should not be considered to be covered by IR35
Financial Risk – Putting Work Right CEST asks: ‘If the client was not happy with your work, would you have to put it right?’
Clarifying this point in your contract can both help your commercial relationship with your client and contribute to the picture of you being outside IR35 because you bear financial risk in a way that an employee does not. CEST recognises that if you have to put something right without being paid for that work, it is an opportunity cost to you – ie you cannot bill that time to someone else. Most freelancers would take this approach to correcting work and so making this clear in your terms is no disbenefit to you.
Part & Parcel – Corporate Benefits With a Financial Value CEST asks: ‘Will your client provide you with paid-for corporate benefits?”
That freelance gig where you get to use the company’s gym may sound cool but is a factor in you being regarded as an employee rather a freelance. Even attending the client’s staff Christmas party can be evidence of employment.
Best to insert a section in your contract to the effect that there is no expectation of corporate benefits in kind
Part & Parcel - Management Responsibilities CEST asks: ‘Will you have any management responsibilities for your client?’
This is one where clarity in a contract is critical to avoid falling into the scope of IR35 inadvertently. What HMRC says is :
“These are tasks that usually require some level of seniority to perform such as: hiring or firing staff, planning work, setting priorities, managing budgets, co-ordinating staff or delivering appraisals. If workers are asked for feedback on other staff but are not delivering the appraisals, this is not management responsibility.
If workers do not have management functions, feedback on things informally or do not actually hold the responsibility for carrying out the task, this would fall within the ‘No’ category for CEST.”
It may well be that on a longer assignment you end up with some supervision of a client’s employee who is junior to you. If this is formalised and you are part of their line management then this is likely to contribute to being you being under IR35, but if it’s informal then it’s vital that this distinction is agreed with your client and recorded.
Part & Parcel – Introducing Yourself to Client’s Customers & Suppliers CEST asks: ‘How would you introduce yourself to your client’s consumers or suppliers?’
CEST does not reflect the nature of PR where a freelancer is likely to be contacting stakeholders who are neither customers nor suppliers. The most obvious is the media but may include other stakeholders such as local community groups or industry bodies.
It is for the judgement of the freelancer whether using a client’s email address is better for contacting these kind of stakeholder than using their own email address and to our knowledge it has not been tested whether HMRC regards ‘other stakeholders’ as being either customers or suppliers. In our opinion, they are neither.
Erring on the side of caution and using your own email address would logically, contribute to the picture of being outside IR35, but the HMRC’s stance is unclear on this.
Working On Your Own Account – Other Clients CEST asks: ‘Are you required to ask permission to work for other clients?’
This is a prime opportunity to insert a clause in your agreements which permits you to do similar work for other clients.
What HMRC says: “This question asks whether the worker is subject to a restraint of trade clause. Restricting the worker’s right to work suggests that the worker is not engaged in an independent business.
If the contract in any way prevents or restricts a worker from doing similar work for other hirers, then this falls within the ‘Yes’ category for CEST.
If a worker is free to work anywhere else – including for competitors, without any contractual restrictions – then this would fall within the ‘No’ category for CEST.”
It should not be controversial to have a clause in a contract which makes it clear that working for other clients is to be expected. The question of non-compete clauses is more delicate and a possible compromise position is a clause to the extent that a freelancer will inform the client where this is likely to be a possibility and agree terms at this point but in return the client does not have the automatic right to restrict who the freelancer works for.
Creation of Ownership Rights – Intellectual Property & Copyright CEST asks: ‘Does the contract state the rights to this work belong to your client?’
A freelancer needs to ask whether they are likely to create assets in the course of an assignment which might have a value to someone other than the client for whom they are created and which would have ownership rights.
If the possibility is remote then it is to the benefit of the freelancer to answer NO and to make this clear in the terms of the contract.
HMRC states: “If during the contract no assets are created, this would fall within the ‘No’ category for CEST.”
The existence of clauses which transfer ownership to the client are in HMRC’s eyes, indicators of employment rather than an independent business.
The exception to this is where clauses exist which indicate that freelancer also has ownership rights which might provide further payment beyond their creation.
HMRC states: “If a worker has some say in what happens to the ownership rights, which means they may be able to receive further payment for the rights, then this would fall within the ‘No’ category for CEST.”
It all comes down to how probable this is. Freelancers may think they are giving themselves protections by having contract terms which deal with IP ownership, but for something that is unlikely ever to exist and which in the meantime creates a needless disbenefit.
Worker’s Contracts – Series of Contracts CEST asks: ‘Have you had a previous contract with this client?’
This is a yes/no question and HMRC states: If a worker has or has had another contract with the hirer, then this will fall within the ‘Yes’ category for CEST. Short-term contracts that are renewed would fall within this ‘Yes’ category.
Freelancers should consider whether this is a benefit or not when deciding who to work for.
Worker’s Contracts – Time Available CEST asks: ‘Will this work take up the majority of your available working time?’
HMRC states: A worker works for one engager for 25 hours per week over the course of a contract. For the rest of their available time they can work 15 hours for others. They rarely do any more hours than this for personal reasons. This would fall within the ‘Yes’ category for CEST as the engagement takes up most of the available work time.
A worker works for one engager for 15 hours per week over the course of a contract and is only able to work another 10 hours, out of their available working time, due to their personal circumstances. Then this would fall within the ‘Yes’ category for CEST because the worker is spending most of their available time on this contract even though they are not working more overall hours.
A worker works for one engager for 15 hours per week over the course of a contact and the rest of their available time is 25 hours. In this instance, the contract does not make up for the majority of the available working time and would therefore fall within the ‘No’ category in CEST.
This is hopelessly unclear because it doesn’t say over what period of time the assignment lasts. Four days’ work in a week is a clear majority. Four days work in a month plainly isn’t.
Work of a Similar Kind for Other Clients - CEST asks: ‘Have you done any work for other clients in the last 12 months?’
Here’s what HMRC says: “CEST considers what work could contribute to a worker’s business, not the business of someone else as this can be important when considering employment status. Working for other engagers performing work of a similar nature can indicate a worker is in business for themselves. It can show a business structure exists and the individual is not solely reliant on one engager.”
This is important to the overall picture that all parties should focus on when determining employment status.
As above on the writing in a of clauses allowing a freelancer to work for other clients, it is vital that a contract embraces the idea that you are working for yourself rather than a single client.
Final output of CEST
You can review your answers before getting a final result in CEST and HMRC says they will stand by the result, unless the contract terms change in which case the test must be retaken to factor in the changes.
Importantly HMRC says “HMRC will not stand by results achieved through contrived arrangements that have been deliberately created or designed to get a particular outcome. We would see this as deliberate non-compliance, and you risk financial penalties.”
This blog is NOT an invitation to contrive anything and we believe that all the clarifications suggested here are natural and in the custom and practice of modern PR freelancing but CEST has been the subject of enormous criticism and part of the reason for that is that is hopelessly vague on many questions and seems oriented to work done in the construction industry as seen in its focus on the cost of materials, vehicles and tools and it is weak on sectors where professional judgement, expertise and engaging with stakeholders other than customers and suppliers is intrinsic to the assignment.
This blog aims to suggest how a focus on clarifying areas of engagement in a contract can help PR freelancers and their clients avoid being incorrectly caught up in IR35 for reasons of vagueness in both HMRC’s understanding of modern day PR and poorly drafted contracts.