IR35 for virtual assistants - what does it mean?
Essentially IR35 stems from highly paid IT execs forming a Limited Company to get paid via dividends instead of doing PAYE tax, so not only were they paying less tax overall on their “self-employed” earnings, they were also able to claim expenses of running the company (e.g. mobile phone, car expenses, “business” trips etc) off the top line of their income thereby paying even less tax. HMRC were not impressed and cracked down on it using this piece of legislation called IR 35, which meant they were able to extract the tax the parent company/client should have paid to the employee.
Does IR35 apply to virtual assistants?
In order to prove that people are genuinely self-employed HMRC came up with a series of tests. Just working for multiple clients doesn’t automatically make you exempt from IR35, nor does remote working from home. It centres on the relationship you have with that client and the balance of power within that. So as a VA these things can protect your clients from falling foul of you being classed as an employee rather than self-employed:
- You use your own equipment
- You decide what work you do and when, where or how to do it
- You can substitute another worker into the role
- You work for multiple clients
- You decide the rate you charge, and are responsible for the overall success of the business
If HMRC investigates and decides you are an employee rather than self-employed, the status of your business decides who pays the fine... Sole traders, it will be the client; Limited companies, it will be the limited company director.
This is why a number of bigger clients are insisting their VAs are limited companies before working with them: You would bear the IR35 fine of being designated an employee by HMRC, instead of the company.
Being self-employed or an employee applies to ALL VAs and ALL clients. So your contract can be outside of IR35 legislation, but still deemed to be an employment contract. It isn't just a tickbox Yes/No decision but HMRC takes all these things into consideration and decides on the balance of probability what the real status is.
IR35 for virtual assistants only applies in specific situations (see flowchart below or download).
What do I do if a client says they cannot work with me "because of IR35"?
Explain IR35 only applies to a certain size of business - they need 2/3 of the following to apply:
- Do they have more than £10.2 million turnover?
- Does their balance sheet hold more than £5.1 million?
- Do they have more than 50 employees?
If they do not fulfill 2/3 of these IR35 does not apply, but self employment rules do... Tell your client:
- I use my own equipment and software
- I can substitute other people (i.e. Holiday cover, sick leave).
- I have multiple clients.
- I set the rate for the work.
- You will sign a proper self-employed subcontract.
- I reserve the right to turn work down.
- I work remotely.
- I manage my own time.
And as such my business is classed a proper subcontractor, not an employee.
(Limited companies especially need to make sure they stick to these rules, as they'd be liable for any back taxes/fines if found to be an employee or deemed to be working under IR35).