Tax Preparation Specialist Offers Guidance for Workers Embarking on a Career within the Freelance Sector
As the nature of employment shifts and increasing numbers of workers enter the freelance world of self-employment, freelancing and contracting continues to be a popular option for workers in a number of sectors including IT, healthcare and finance. However, the rise of freelancing as a compelling employment option brings an increasingly baffling array of financial set-ups designed to help freelancers and contractors become as tax-efficient as possible. David Redfern, Managing Director of DSR Tax Refunds Ltd, offers his guidance to would-be freelancers to assist them in choosing the most suitable method of working.
Since 2009, the freelance economy has grown by 25% and was worth £125bn to the UK economy in 2017, according to figures by the Association of Independent Professionals and the Self-Employed (IPSE). Freelancers now comprise around 6% of the working population, at just over 2 million workers. Although freelancing is often seen as a preserve of the young, with a rise of 66% in people aged between 26 and 29, figures show that 48% of freelancers and contractors are aged between 40 and 59. With such large numbers of workers choosing self-employment as a freelancer or contractor, what should someone considering this as an employment option take into account?
Redfern’s first advice is to consider how you are going to set up your business. The three main options for freelancers and contractors are to register as a sole trader, set up a limited company or use an umbrella company. He states “For many freelancers, the simplest option is to work as a sole trader and submit your tax return and pay your taxes through the Self Assessment system. You will be able to deduct any allowable expenses from your overall earnings, which is pretty simple if you use cash-basis accounting. To take this option, you need to register as a sole trader with HMRC and obtain your UTR (Unique Taxpayer Reference). However, some contractors might find themselves more attracted to the flexible tax planning that operating as a limited company can offer. But this option does require considerably more effort – not only will you have to file your company tax return with HMRC, you will also have statutory obligations in terms of filing annual accounts with Companies House. This option also requires you to consider your liability under IR35”. Whichever method chosen, keeping accurate business records is essential.
IR35 has long been seen as the thorn in the side of the contracting industry and continues to be so. Introduced in 2000 by the UK government to prevent contractors obtaining unfair tax advantages through “disguised employment”, IR35 continues to cause controversy among contractors who use limited companies, Personal Service Companies or other intermediaries. HMRC’s online tool, CEST (Check Employment Status for Tax) for determining IR35 status is still considered by many to be unfit for purpose. Redfern states “The question to ask yourself is who controls the work that you do. If you are a contractor using your own equipment, on your own premises, paid by the job rather than by the hour, then you are unlikely to fall foul of IR35. However, if you are based on client premises, use their equipment and are paid an hourly rate for your services then you are on less steady ground and it would be beneficial to obtain expert advice on your employment status as HMRC continues to target those they believe are erroneously claiming self-employment for tax purposes”.
For those contractors who wish to remove any IR35 liability, using an umbrella company is an option. Because these companies act as “employer” to contractors and freelancers, this removes any risk associated with IR35. The umbrella company pays the contractor via PAYE and allows the contractor to retain some eligibility to benefits such as Statutory Sick Pay and Statutory Maternity Pay. However, Redfern advises anyone looking to use an umbrella company to do their research, stating “Umbrella companies are a valid option for contractors who don’t want the hassle or complication of either the sole trader or limited company option, but a number of umbrella companies offer tax savings which contravene HMRC regulations. Considering that the basic income tax rate is 20%, the government’s advice is to use caution when looking at companies offering to allow you to keep 90 to 95% of your pay. As always, you and only you are responsible for ensuring that you are paying the correct amount of tax and HMRC always take a dim view of tax avoidance”. Whichever freelancing option you choose, Redfern states that ensuring full HMRC compliance will lead to a far less stressful outcome in the long term.
About DSR Tax Refunds Ltd
DSR Tax Refunds Ltd are a firm of tax rebate specialists serving clients nationwide. DSR Tax Refunds are tax preparation experts who specialise in identifying potential allowable expenses for tax rebates for clients. Their specialist team can help employed and self-employed subcontractors with all relevant paperwork to ensure their claim is handled in an accurate and efficient manner.
For more about DSR Tax Refunds, visit https://tax-refunds.co.uk/
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DSR Tax Refunds Ltd
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Registered Office: Suite 637, 109 Vernon House, Friar Lane, Nottingham, NG1 6DQ