Engaging freelancers: Tax issues

May 2013

HMRC approach

• Employment status of freelancers is a key area for HMRC

• HMRC intends to refocus efforts on employer compliance to raise additional tax revenue

• Good time for end users to review existing arrangements

Engaging a freelancer directly

• Deciding a freelancer’s employment status is not straightforward:Conflicting case law HMRC guidanceSpecial rules for “behind the camera” and “front of camera” workers

• If HMRC consider a freelancer is an employee:Employer is liable for PAYE/NIC Arrears for 4 years unless employer careless in which case period is

extended to 6 years Interest and penalties But able to offset any income tax and Class 2/Class 4 NIC paid by

the freelancer

• Employment law risk

Engaging a freelancer via a PSC

• End users can generally protect themselves from PAYE/NIC liability by engaging a freelancer via a PSC

• If IR35 applies the PSC rather than end user becomes liable for PAYE/NIC on fees received less certain statutory deductions and allowances

• Government has abandoned the proposal under which end-users would have been liable to operate PAYE and pay employer NIC where “controlling persons” provide services via a PSC

Engaging a freelancer via a PSC

• From 6 April 2013 IR35 applies if:Ignoring the existence of the PSC the freelancer would be an

employee of the end userIgnoring the existence of the PSC the freelancer would be an

officeholder of the end userThe freelancer is an office-holder and provides services

related to that office through the PSC

• New HMRC approach to IR35 investigations

Engaging a freelancer via a PSC

• Important to ensure that arrangements are robust Valid contract between the end user and PSC Contract is one of self-employment

• Points to watch:Does the PSC have a presence in the UK – if not end user

may be liable to operate PAYE if the freelancer works under their direction and control?

Is the PSC a managed service company?Is the freelancer a “worker” for the purposes of the WTR and

auto-enrolment?

Engaging a freelancer via a third party intermediary

• Ensure third party intermediary (eg umbrella company or agency) operates PAYE and NIC

• Beware offshore umbrella companies