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Something close to Lightnix's heart!

Paul J Need

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With the introduction of Self Assessment in 1997 the Inland Revenue gained the power to mount an investigation into any company or individual, at random and without giving any reason or warning. At the end of 2001 a small set and decoration company in Berkshire was subject to just such an investigation. The Inland Revenue decided that the freelancers they had been using were booked under terms and conditions which meant they were classed as employees rather than self-employed subcontractors. As is usual in these cases the Revenue said that the money paid to these freelancers over the last few years was just their nett pay. The arrears bill sent the company into liquidation. Some while earlier a mains and generator supplier to the Industry found itself landed with an arrears bill of around £70,000 for National Insurance Contributions, again because it's freelancers were booked in a way that made them employees of the company, rather than self-employed subcontractors.




While these two cases alone do not amount to a campaign against the Industry by the Inland Revenue, they may well be the shape of things to come. Our industry is a sitting duck for this kind of attention from the Taxman because most freelancers are either operating in a way, or being booked in a manner that prevents them from being classed as genuinely self-employed. The fundamental problem is that both freelancers and their clients want to enjoy all the financial benefits of self-employment, but refuse to accept, or are unaware of the responsibilities that go with that particularly special status. There is a common, even willful misconception on all sides of the Industry that "freelance automatically equals self-employed", which is simply not the case.




A 'freelancer' is merely someone who supplies services to a number of different clients. They can be taxed for each job either under Schedule D or PAYE, depending on how they operate their 'business' and the terms under which their services are engaged; NOT according to what the freelancer or their accountant think. A 'freelancer' (or rather 'contractor') may be taxed under Schedule D for one job, but under PAYE for the next, even if supplying services to the same client, according to the terms and conditions under which their services have been engaged on each job. Freelancers and those who use them must stop thinking of freelancers as though they were 'temporary employees' and must start treating them as 'contractors', their correct status if they are to be classed as genuinely self-employed.




The Inland Revenue website is a mine of information on this subject. Clear cut explanations of the regulations regarding Employed vs. Self-Employed and what they mean to us all, in frighteningly plain English, can be found there.


Of particular relevance to out industry are the IR35 and IR56 Regulations, which basically determine under what conditions a person may be deemed truly self-employed.


Useful links are listed at the end of this article. For a brief summary of the basic indicators of Employment and/or Self-Employment, see [Title] on page [n].




While it's true these days that many companies insist on their crews having their own insurance, tools and safety kit, not all of them do. Even when they do, a lot of them blow it immediately by sending out purchase orders booking people for x days at y pounds per day with z per diems; conditions which, in the eyes of a Tax Inspector, define their subcontractors as PAYE-taxable employees. What (very basically) should happen here is that a purchase order should only show the total price for the job 'as quoted' by the subcontractor for 'providing services as...' Even then, would a taxman really believe that this group of 'self-employed subcontractors' had 'just happened' to quote exactly the same price as each other on every single job? It was actually the notion of the Daily Rate that did for the set company mentioned at the start of this article. Even so, we still continue to meet far too many 'subcontractors' who not only don't have, but are still completely unaware that they should have, at the very least, their own Public Liability insurance and yet seem to remain in regular work despite this.




In a nutshell: if (when) this industry winds up operating completely under PAYE, the cost of engaging the services of freelancers will rise by around 25%. The employers (as they will legally then become) will be lumbered with Employer's NI at 12%, Holiday Pay at 8.3% and even Statutory Sick Pay, along with the costs of providing insurance, tools, PPE, etc. There will also be several back tax bills flying around, most of which will certainly sink many of the small companies which make up the majority of our industry.




Also, if they become employees, most freelancers are almost certain to start asking questions about hourly pay, or just how long 'a day' actually is and what the overtime deal is after that. This will make it impossible for hire companies to give a fixed price for a job in advance. As more companies switched to PAYE there would be a diminishing financial incentive for freelancers to maintain their own insurance, etc. and we might see the final push into PAYE coming from the freelancers themselves. Television and Theatre style unionisation might then be just a short step away (Heaven forbid!).

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