Freelancers' Questions: Any risk to freelancing for my ex-boss?
Freelancer's Question: I have been offered some work by an ex-boss. I expect several small projects over the next few months partly working at home but also on site at the employer's office. I don't expect any future work elsewhere, although there maybe a few small projects from the same company if they lack my skills in-house. As I don't envisage this work being regular, bringing in only, say, a few hundred pounds a year, do I still need to register as self-employed with HM Revenue & Customs and declare these earnings? I assume I don't. And does my previous direct employment at the client company have any bearing on my position?
Expert's Answer: Any income derived from a trade or vocation is taxable income, regardless of the amount involved. If you are genuinely self-employed then you will need to register as such with HMRC and declare your earnings to them on your personal tax return.
The wider question to consider in your case is how the income should be taxed.
If you choose to work via a limited company, you need to consider the IR35 rules as, if you are not genuinely self employed, these could treat you as being a 'disguised employee' of the end-client (particularly if you have worked there before as an employee) and result in your tax bill being higher than you may expect. If you choose to work as a sole trader, the onus is on your client to consider your employment status as this will determine whether they can pay you gross or net of tax and National Insurance.
From an IR35 perspective, it would be good to ensure you have contracts in place for each project/body of work you undertake for the client (rather than having one contract to cover all work carried out). Negotiating fixed fees for each project will also help you to demonstrate that you are in business of your own account.
Ensuring that you can distinguish the way you work to that of the employees employed directly with your client will also help you to avoid liability under IR35.
The expert was Martin Hesketh, managing director of contractor accountancy firm Brookson.
19th August 2010