Many sole traders and sub-contractors may think that they are self-employed, but the Taxman might take a different view. It is a common practice for people to hand their clients business card, invoice and letter saying that they are self-employed and responsible for paying their own taxes. This is insufficient to prove that you are self employed.
You may feel surprised but HM Revenue & Customs has a different view on defining “Self employed”.
However everyone who is in employment pays tax before they get paid. Being self-employed gives you lots of control over your cash before you pay tax.
This gets even tougher if you have any sub-contractor. Imagine your sub-contractor gives you the invoice and a written letter informing you that he is self-employed. You are still not in clear. It is the responsibility of each business to ensure that you carry-out sufficient duties in ensuring that your sub-contractor is self employed “as per the understanding of the tax man”
If you are clearly in business on your own account then you have nothing to worry about on this score. However, if you tend to work for just one client most of the time or each job is punctuated by long spells of unemployment, then you might be deemed to be an employee rather than a self-employed person. Remember, being employed or self-employed is not a matter of personal choice. It depends on your circumstances.
As you can see, some of these are very grey areas and it is not always obvious whether someone is self-employed or not. The consequences of getting it wrong can be severe though because all employers are obliged by law to operate PAYE on the earnings of their staff. Therefore, if you pay someone without deducting tax and NI and it turns out that they are not self-employed after all, you will be deemed to have paid them net and may be forced to pay even more tax and NI than if you had deducted it in the first place.
It is for this reason that many employers are loath to hire workers on a self-employed basis and insist that they work through their own limited companies. The onus is then on the worker to prove that they are truly self-employed otherwise they could fall foul of the dreaded IR35 rules.
If you have any more questions please contact us on 0161 339 4989 or email firstname.lastname@example.org.