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Determining the correct tax and National Insurance status of freelancers has always been fraught with problems, especially with the advent of IR35 legislation and the Inland Revenue?s increasing interest in this area, writes Mark Perry.

I am often asked two questions about hiring freelancers.

The one I am happier to answer is, ?I?m taking on a new freelancer. Are there any tax implications for us?? The second, more worrying question is, ?We?ve been paying someone on a self-employed basis for a number of years. Do we have any tax problems?? The answer is often the same to both questions, but the second can have much more serious consequences.

The first point to consider is the individual?s employment status. There is a technical explanation, but in practical terms there are a number of factors to consider, the main ones being:
? Is the person in business on his/her own account?
? Does the individual have to provide the service personally?
? Does the hirer have the right of control over how/when/where the work is performed, even if this control is not exercised?
? Is the person ?part and parcel? of the business or ancillary to it?
? Does the person provide tools and equipment? If so, to what extent?
? Can he/she make a loss from the engagement?
? What is the basis of payment ? by the job or by the hour?

In addition, indicators such as no holiday or sick pay are simply evidence of the intention to be self-employed. In fact, the rights to such payments derive from the employment and don?t help to determine its nature ? you shouldn?t receive them if you are not employed, but you may not receive them even if you are.

If you ask these questions of any freelancer and are not convinced of their self-employed position, there is a risk that they are in effect an employee and it?s best to discuss the situation with an advisor.

To make the situation easier in film and television, where freelancers are prevalent, the Inland Revenue has issued industry guidelines allowing self-employment with certain conditions. While these are industry-specific, there is no reason why they cannot be extended to live theatre, for instance, where the use of lighting and sound technicians is similar. Very specific rules also apply to entertainers, who can often be treated as genuinely self-employed for tax, but employed for National Insurance purposes.

Another important question is, ?They bill us through a limited company. Does this change things?? Yes, it does. If the contract is arranged with an intermediary personal service company to provide the services of its employee, rather than with the individual, and the invoice is from the intermediary, then the rules are different. As you are paying another company, there are no PAYE or NIC implications, so this is often perceived as a safer route. Whether or not the person would have been employed, but for the presence of this intermediary, is a question for the service company to consider. The structure is generally used by larger media and entertainment companies because any liability for underpayments falls on the service company under the legislation commonly known as IR35.

In all this there are two main issues: tax and employment law. Under tax legislation, the amount of tax payable as an employee and self-employed person is generally the same (assuming little or no assets or expenses); the main issue is National Insurance (NI). A self-employed person still pays a contribution, but there is no equivalent of the employer?s contribution in the self-employed rates. The Treasury loses 12% of gross earnings over this, hence the Inland Revenue?s interest. Artificial self-employment has been used in the past to cut down payroll and NI costs. If the Inland Revenue does mount a challenge, as a minimum they will seek recovery of the employer?s NI contributions. If an individual has been careless with their own tax affairs, the tax office may also seek to recover any tax underpayments from the alleged employer.

The other important issue is employment law and employee rights. An employee is entitled to sick pay, paid holidays, redundancy, etc. There are also liability issues if they are involved in an accident at work. Also, even if they are properly self-employed, but are required to provide personal service, then as a ?worker? they might still be covered under the National Minimum Wage rules. You must keep records (failure can lead to penalties) to demonstrate that they have been paid at or above statutory levels.

Mark Perry is a Manager in Baker Tilly?s Employer Consulting Group.
t: 020 7314 6866; e: mark.perry@bakertilly.co.uk