Freelancer’s Question: I'm starting my own business in mid-April, but my current employer hasn't managed to replace me yet, so I've agreed to work for three days a week for a few months because I don’t wish to be unkind and leave them in the lurch.
My employer wants to just change my contract from five working days to three but I'm guessing that would be complicated, as I'd be billing other work as a limited company and receiving PAYE for the three days too (at the higher tax rate).
I think a cleaner approach would be to freelance for them, rather than getting paid PAYE. Is my reading of this situation right, or are there other considerations I should make?
Expert’s Answer: This is not a clear-cut situation, unfortunately.
If you continue to carry out the same work on the same terms for the business that was previously your employer, with the only difference being that you drop from five days to three days a week, then HM Revenue & Customs may well view you as still an employee of theirs, under a set of rules that you may have heard of - IR35 - and charge you tax and NI accordingly.
And it would be your own company, rather than your "employer's", which would be liable for this extra tax and NI. Individual projects and contracts can be caught by IR35 even if your whole business isn't.
The best way to avoid this would be to put your relationship with your former employer on different terms, and also make sure that you're not on the same terms as continuing employees. HMRC will look at the whole picture here, but a few examples would be:
- You have to correct any mistakes on your own time
- You are in control of deciding how and where the work will be done
- You have the right to send a substitute person to do your work if you're not available
- You have to pay to use the staff canteen if food is provided free for employees
Make sure you discuss this thoroughly with your former employer. I'd also recommend you have your contract reviewed by an IR35 specialist or your accountant, before you go freelance. Otherwise, you may be safer to keep your current role as part-time employment and freelance for the rest of your projects.
The expert was Emily Coltman FCA, chief accountant at online accountancy solution FreeAgent.
Editor’s Note: Further Reading –