August 02nd, 2019
Legal Talk 30: How to deal with the legal issues re: taking on freelancers
"What is IR35 and how does it apply to freelancers I take on?" You ask.
Okay, quick answer, as I must dash to another meeting.
If you hire a freelancer you pay less tax (because you don't pay employee national insurance because the freelancer is not an employee of yours). So, you benefit tax wise. Likewise, the freelancer (if acting through their personal services company) pays much less tax than if they were an employee. So, the freelancer benefits tax wise too.
The only entity that loses out in this arrangement is HMRC.
So, one thing HMRC does is scrutinize this type of arrangement just to make sure that you are not actually just taking on employees whilst pretending that these are actually freelancers so that you and the freelancer benefit tax wise.
To prove that the freelancer is indeed a freelancer and not an employee for tax law purposes, things you can put in place include:
1. The freelancer is trading through a personal services company;
2. The freelancer is not behaving like an employee and not being treated like an employee. For example, the freelancer might be working for a number of different organisations on different projects, which is not what a full-time employee would normally do; and
3. The freelancer’s personal service company has the option to substitute someone else in place of the individual freelancer, provided that the other substitute freelancer has the same skills and experience as the individual freelancer that you have chosen. Again, an employee would not be able to substitute themselves with someone else.
4. It's useful to go through a checklist to ensure that the freelancer is legally classified as a freelancer and not an employee of yours, so that both you and the freelancer can benefit from the tax law advantages, even if this arrangement is scrutinised by the tax man.
“Fantastic”, you say. “So, hiring a freelancer is going to give me quite a lot of flexibility and also is going to save me tax; is that right?”
Absolutely, you got it.
“I will start with freelancers and if things go well and I need a permanent ongoing workforce to service client work then I might think of hiring full time employees. “Thanks for the tips, I think I’m going to need to start hiring quickly.” You say.
I'm amazed at how fast your company is growing. The excitement is palpable.
Your Legal Coach
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