Freelance taxes – do you employ freelancers? Don’t fall foul of the taxman

Many businesses make use of freelancers to help them with specific tasks. It’s usually a mutually beneficial arrangement ­– you draw on the skills of people you don’t have in-house, and you simply pay their invoice without having to worry about the hassle of payroll or other red tape. The freelancer gets money and experience, which makes it easier for them to win new clients. But you need to be aware of freelance taxes or more particularly how a freelancer is taxed.

Where things get a bit more shady, however, is when companies employ freelancers to fill what amount to full-time roles. HMRC takes a low view of this, and tends to see the situation as an attempt to avoid shelling out for sick pay, pension contributions, maternity leave and employer National Insurance Contributions (NICs).

That’s why, if your company is found to be in breach of laws regarding the hiring of freelancers, you can end up being fined up to 100% of the tax you would otherwise have owed. So you need to be careful.

This is something that came into sharp focus a few years ago when taxi-booking app Uber got taken to tribunal by two of its drivers, who raised the case on behalf of a group of 19 Uber workers. They argued that they were not freelancers, but ‘workers’ under the terms of the 1996 Employment Act.

The tribunal agreed, and was damning in its verdict. “The notion that Uber in London is a mosaic of 30,000 small businesses linked by a common ‘platform’ is to our mind faintly ridiculous,” it pronounced.

‘Workers’ under the act (not ‘employees’), are entitled to:

• 6 week’s paid annual leave
• A maximum 48 hour average working week, with rest breaks
• The national minimum wage (and national living wage)
• Protection of whistleblowing laws

However, as they will not be ‘employees’, they can’t claim unfair dismissal or get statutory redundancy payments, along with various other benefits.

(If you want to learn more about freelance taxes and the distinction between ‘employees’ and ‘workers’ visit the government’s site on employment status. In a nutshell, a worker has a written or implied contract to do work or services, has a limited right to subcontract, has to turn up for work and not do the work as part of a limited company where the customer is a client).

If you use individual freelancers on a near-permanent basis you need to be very careful indeed not to fall foul of the law. If the taxman decides that these people are in fact ‘workers’ or even ‘employees’ you could be facing a very big demand for back-tax indeed.

So if you have any questions about the services you pay freelancers to provide, please get in touch. We’ll help make sure that you are relying on the expertise you need, but while minimising the risk of being stung for back-tax or being taken to tribunal.

For another blog about the most common mistakes freelancers make – click here