What is your tax status? Employee or self-employed?  This matters if you are a sole trader or if you operate through your own company.

Freelancers or contractors working as self-employed sole traders can deduct business expenses from income; this reduces their tax bill.

The Revenue is keen to examine the facts of the assignments and your tax status to make sure you are genuinely self-employed (and not an employee of your client).

The key difference between self-employment and employment is:

  • are you providing a contract of service (employee); or
  • a contract for services (self-employed)

You are self-employed for tax if you can answer “yes” to all these questions:

  • Do you risk your own money in the venture?  If it goes wrong would you have to put things right for free or could you make a loss;
  • Can you hire someone to do the work?  It doesn’t mean you have to but could you;
  • Do you provide the main tools for the job?
  • Can you decide when, where and how you work?
  • Do you work for several people or businesses at the same time?

If the Revenue dispute your tax status and deem you to be an employee and not self-employed then your client will be treated as the employer and will be liable for PAYE and penalties for not operating PAYE correctly.

As a result most contractors and freelancers operate through a Limited company; however HMRC can use the IR35 rules to pretend that the intermediary company does not exist.

If you answer NO to any of the questions below the IR35 legislation may not apply, if you answer YES to every question you should seek advice from your accountant.

  1. Do you provide your personal services through a limited company?
  2. Did you take income from the company in a form other than salary, for example dividends?
  3. Do you own more than 5% of the company?
  4. Is the contract between your company and the client similar to employment (see above)?

It may still be beneficial operating through a company as you can deduct 5% of your turnover and some expenses before calculating income tax and national insurance.