Freelance or Freelancer Self Employment Trading options

 

 

The terms freelancer or contractor are generic terms given to describe the various official UK government titles that specifically describe the trading and tax structure that you may choose.

The options include:-

Trading structure – Legal category – Your tax status

Limited company -Incorporated -  Company director and/or employee of your compan

Sole trader  - Unincorporated -   Self-employed

Partnership  - Unincorporated - Self-employed

Limited liability partnership – Incorporated - Self-employed

Umbrella company – Incorporated - Employee of the umbrella

Note: An incorporated business is a separate legal entity. You can think of it as being like a separate person – it can own things, have bank accounts in its own name, and it can be liable for debts or lawsuits. If you are unincorporated it means that you and the business are one and the same – there is no legal separation.

 

Each of the above has different trading and taxation rules it need to follow, and at this point it may be advisable to get professional advice to ensure you choose the best trading structure for your unique needs. 

 

Sole traders and ordinary partnerships:-

Sole traders and ordinary partnerships are known as unincorporated businesses – in other words,

you are self-employed as opposed to having a separate corporate structure. As a result sole

traders and partners in a business report their income on their own income tax self-assessment

return. Sole traders will complete a self-employment page and the individual partners will complete a partnership page.

 

If, as a sole trader or partnership you are deemed employed then your client will be liable for

tax and NICs on the fees they have paid you. This can be charged retrospectively for as long

as the engagement took place, even if that means several years. It can be very expensive and

probably won’t do your client relationship much good if the situation should arise.

 

limited liability partnerships (LLP):-

Under an LLP structure the Intermediaries Legislation (IR35) will apply and thus if the engagement

is deemed by HMRC to be employment, the partnership itself will be liable for the extra tax and

NIC’s both employers and employee’s.

 

Implications for limited companies:-

If you are the director of your own limited company through which you bill your client(s), and the

taxman says you are deemed employed, then the IR35 legislation can kick in, allowing HMRC to

re-classify the engagement between you and your client as IR35 caught.

 

If you are working with more than one client you are less likely to be caught by IR35 however it is

not impossible for IR35 to apply to one or more of them since IR35 is assessed engagement by

engagement.

 

The typical relationship involving a freelancer trading through a limited company is:

Engaging organisation (the client) – limited company service provider (your company/the

“intermediary”) – the worker (you), and there may be an agency between your company and the client.

What the IR35 Intermediaries legislation allows HMRC to do is create a hypothetical contract

which asks the question: “If the intermediary (your company) was removed from the business

relationship and the worker (you) were engaged directly by the end client what would that

relationship be?”

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If HMRC can successfully argue that the relationship would most closely represent a contract of

service (employment), then only for tax purposes and only for the engagement(s) in question, you

will be deemed an employee. And in this scenario, you can only be deemed an employee of …

your own company!

 

The taxman will then insist that your own limited company should have deducted PAYE tax and

NICs on the all of the fees paid by the client, as if the fees were salary payments. The additional

tax due can be charged retrospectively going back up to six years.

They may also charge interest and penalties, and there are likely to be accountancy fees to sort it all out. That’s how contractors can find themselves owing tens of thousands and sometimes even hundreds of thousands in tax and NIC?s that they weren’t expecting.

 

How HM Revenue & Customs assesses your employment status

 

Currently HM Revenue & Customs (HMRC) use three key status indicators to decide whether you

are a genuine business or whether you are in fact a “disguised employee? of your client. The

principle is that if you have an engagement where you have to provide your personal service,

where there is an obligation to offer and accept work and where you can be controlled by the

engager, then a contract of service (employment) exists.

 

Where any one of these three elements is missing, then it cannot be a contract of employment and

so logically it must be a contract for services (self-employment). In an ideal world, it would be

best to “pass” all three key tests, but “passing” two is better than one. But where these status

indicators are inconclusive, one should also consider “in business? factors or factors which show

that a freelancer is taking the kind of financial risk that would not be required of an employee. In

essence, the more factors in your favour the better.

 

Being in business can be most easily demonstrated by the type of expenditure you incur; for

example, most employees do not need to invest in office equipment and stationery to do their job.

It is highly unlikely that an employee would need liability insurances or to submit invoices in order

to get paid. Also most employees will receive some form of employment benefits and have the

protection of employment law. If you are IBOYOA you will have to make provision for all of these

things and face the prospect of contracts terminating at short notice and with no guarantee of

finding future work etc.

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The key is to think of yourself as a business and act as one. This goes beyond business structure -

It’s a principle that actually starts in your head. You are you, and the service you offer is your

business. In short, genuine freelancers are in business on their own account and bear the

responsibility for the success or failure of their business. They are not „disguised employees?.

Ultimately, a number of factors can come together to create a whole “picture? of your employment

status. So rather than relying on any single factor to protect you from being wrongly accused of

being an employee, make sure the whole picture of your status can reasonably be said to be that

of a business. For more information, PCG provides a wealth of resources for its members, including

tax and legal helplines, and specific guides to IR35 and the Agency Workers Regulations.

Specify your working relationship by means of a contract

In a dispute the courts will look at the contract between your business and your client to infer whether or not you are actually an employee by another name. Therefore, it’s essential to draw up a contract for any large project you take on.

 

Furthermore, it should be a contract for services with your business, not a contract of service

with you personally. This contract should accurately reflect the relationship between parties, and should include clauses that demonstrate your ability to send substitutes, the lack of mutuality of obligation, and that you have direction and control over your work.

Filed: Thinking of Becoming a Freelancer or Contractor in the UK

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