IR35 and Self Employed Sole Traders

This is one of those posts that comes with an important footnote (see below) that you’re going to need to read before taking any notice of what I say here, but there is an important fact that most of the people I’ve heard talking about the recent IR35 tax changes have missed.

I mention this because our members are asking us, why Self Employed Sole Traders are finding their employment status changed at all by the recent IR35 tax changes?

After all, IR35 is intended to limit the use of ‘personal service’ limited companies to mask what should be an employment status – it’s not specifically targetted on Self Employed Sole Traders.

However, it has had a knock-on that affects them. Before these IR35 changes (2017 in the public sector and 2021 for everyone else) lots of engagers made the mistake of thinking that they didn’t need to worry about the employment status of someone that they engage as long as they’re hired through such a limited company.

They thought that this arrangement absolved them of the need to worry about payroll.

IR35 has caused employers to be (over?) cautious about people trading through limited companies. And though they have always carried the tax risk for self-employed sole traders, they have been complacent for years, and they have now woken up to this risk.

That’s right. In the past, before 2017, or 2021, engagers always had the responsibility to determine employment status, and to not engage someone as self-employed when they could put them on PAYE.

Also, the IR35 changes make it more economically viable to go after people who should be employed (in HMRC’s eyes), and what works with limited companies will also work for Self Employed Sole Traders.

A lot of Self Employed Sole Traders have never needed an accountant, but they are now being told that they should be treated as an employee and this is very unnerving for them.

When this does happen, we urge members to negotiate with the engager and ask “what’s changed”?

Our members have no real legal rights to demand an explanation in the way that people trading through a limited company can, though they will usually be prepared to send you a copy of the CEST test.

However, you can’t force them to do this or to do it within 45 days, and in particular, you won’t change their mind using any legal mechanisms.

But the key thing to know here is that engagers have always held the liability on this issue – it’s just that they have often not woken up to the fact until now.

Important footnote: information that this blog provides only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, and it should not be used in place of professional advice. The author disclaims all responsibility for loss arising from any action taken or not taken by anyone using the information in this blog.