Freelancers could be mistaken for employees by HMRC

If you are a freelancer, then you’re part of a strong business group that’s has growth steadily over the last year; according to the Recruitment and Employment confederation (REC) report (JobsOutlook) published this year; the report revealed that despite concerns with both the current UK economy and the Eurozone, the demand for freelance contractors still remains strong.

It goes on to say that the majority of UK employers still plan to hire more freelancers, for both short-term and long-term job contracts. Also, despite no holiday pay, lack of sick benefit, pensions etc freelancers are still able to command much higher hourly rates of pay than permanent employees – and enjoy a more flexible working hours.

However, a recent number of cases has flagged up the need for Freelancers to differentiate and protect themselves, not only for them to manage the liability within business but to clearly define the relationship between both parties regard HMRC IR35 regulations.

A recent 7 year dispute that concluded in 2011 involving Airbus UK and reported in demonstrates how HMRC can view freelancers.  HMRC challenged the relationship between Airbus UK and their freelance contractors as suspected employees. Unfortunately, in this instance the freelancer lost the case resulting in payment of back dated tax, national insurance to HMRC.

What is scary about the Airbus dispute is the length of the dispute demonstrating the complexities of IR35, but also highlights the importance that the courts place on the factual reality of the relationship between the parties. Whilst both contractor and company can strengthen their case by ensuring that their relationship is documented within a contract, it is essential that a contract reflects the ‘reality of the relationship’. The Business entity test is part of the IR35 assessment, this check list will help you shed some light on the criteria required to comply with in order to communicate with HMRC and establish your business as a separate entity.

David Reilly, Director at Create Ts and Cs, who provides the service of bespoke contracts to companies who intent to work with contractors commented “It’s critical to protect the business by deploying the right contract when working with contractors, after all from a company perspective, it’s your end client and the work carried out must be of a standard that reflects your business. He continues “From a HMRC perspective its critical both parties differentiate themselves by catering for the IR35 issue within the contract.

A further important way of differentiating both parties is through managing risk, meaning each party acquiring their own public liability and indemnity insurance, which is also reflected in the contract between the companies. Chris Knight of Business Protect, an Insurance Brokerage says “It is becoming more common for the company to insist the contractor acquires their own insurances, after all they are a separate company or sole trader with their own requirement to protect themselves and cover their liability”.

Freelancing is not a straight forward business model and requires investment and planning to manage your risk and key stakeholders like HMRC.