Freelancing, rather than being an employee, is becoming increasingly popular as a way of providing services to those who need them and it’s now easier than ever to find a contractor or self-employed freelancer to do anything.
The wide array of services on offer includes everything from providing housekeeping services and cooking for a special dinner party, to dog walking, virtual PAs, corporate event management and interior design.
For small business owners in particular, freelancing is a very efficient and flexible way to access to any specialist skills that might be needed for a limited amount of time, or for different projects, without having to incur the full cost of retaining a permanent employee. And for the self-employed freelancer or contractor, some of whom also trade as limited companies, it can also be an opportunity to improve work-life balance and working flexibility.
Unfortunately, as far as HMRC are concerned, it represents a significant loss of income to the Treasury and therefore it is often viewed as a mechanism to reduce tax rather than a genuine commercially viable alternative to employment. A recent report from the Trade Union Congress (TUC) put the estimated lost revenue for the Treasury as a result of people choosing to be freelance rather than to go onto the payroll to be in the region of £4bn.
The advent of technology has further accelerated the popularity of freelancing and spawned a number of new business models, each of which owes its success to the availability of an ever expanding workforce looking for self employed flexibility. Uber, Deliveroo, Hermes and many of the other ecommerce courier companies provide good examples of businesses that have thrived as a result of the so-called “gig economy” boom. As well as transportation services, it is also becoming increasingly common for professional tradesmen like plumbers, electricians and other specialists be self-employed but obtaining work through a much larger company which acts as a liaison with the client and effectively passes the work over to one of its freelancers to be completed. Working for someone on a self employed basis.
Where these relationships are long standing and the freelancers obtain all their work from one source, the question of whether the freelancer is in fact self-employed or whether they are actually an employee (albeit they may not be identified as such) is something that is an area of concern for HMRC and one that they are always keen to review in detail.
Reviewing the status of people who supply their services on a regular basis, to the same clients, is something HMRC will routinely look into where they believe it is being abused.
The chancellor, Philip Hammond, has made his position on the use of self-employed workers clear. Aside from ongoing HMRC employment status reviews, with effect from April 2017 public sector bodies will have to assume responsibility for confirming contractor status and the associated tax liability.
This is a clever move because it pushes the consequences of failure to comply with IR35 legislation to the end user, and it is anticipated that to avoid the risk of penalties they will simply deduct tax from the payments made to the contractor – considerably speeding up the receipt (and total) of payments to the Treasury.
Another factor working in the HMRC’s favour is the recent outcome of two high-profile businesses using self-employed workers. Whilst these are two employment tribunal cases, the courts ruled that individuals providing their services to Uber and Pimlico Plumbers had “worker” status which is effectively a hybrid of being both and employee and self-employed.
A worker is someone who accumulates employment rights, whilst providing their services on a self-employed basis. The issue at stake in these cases was not how the individual should be taxed, but rather their rights. If the courts have agreed that these “workers” should have the same rights as employees (because of the working practices and relationship with the “employer”) one can only imagine it won’t be too long before HMRC step forward to argue that if being a worker is akin to being an employee, then the worker should also be taxed in the same way – and hey presto freelancers are suddenly on the payroll.
If your business regularly uses contractors or freelancers (even if they operate through a limited company) now is probably a good time to seek advice with regard to their status. There are usually steps you can take to minimise the risk in the event of an HMRC visit but there’s not much you can do once the enquiry is under way.
Anne Eager is a partner at tax advisors and accountants RJP.