Hiring a freelancer either as you are starting out in business or as you continue to grow can be a great alternative to taking on permanent employees, until you have a clear picture and evidence of what resource you need.
The number of freelancers in the UK is growing, which means there are plenty of people available with a wide range of skills that may be appropriate for your company and the job you need to get done!
There are some benefits to hiring a freelancer:
- They will be an expert in their chosen area of work.
- As an employer, you are not obliged to pay them holiday or sick pay, potentially costing less than an employee.
- You will only pay them for their contracted assignment or the work they perform.
However, there are also some potential limitations of hiring a freelancer:
- Experienced freelancers can be expensive.
- They may be working for multiple companies or projects, so they may not be able to commit to always being available when you need them.
A freelancer agreement is essential to have in place for any freelancer in your business. The contract should include all the details of the working relationship between the company and the freelancer and like all employment related contracts, should be written, agreed, and signed by both parties before any work commences. We are able to assist with the preparation of any freelancer agreements, appropriate to your business.
An important area to be aware of when hiring freelancers, is the IR35 legislation that was introduced in 2020. It is the government’s way to stop freelance contractors from working as ‘disguised employees’, which is when an individual whose engagement resembles employment works through their own limited company and therefore pays less tax than they should and of course as the employer, you are not paying towards their pension or making NI contributions.
If a freelancer is found to be working within IR35 rules, they would be considered an employee for tax purposes and would be subject to tax and NI contributions the same as any standard employee which could put you into the spotlight with HMRC and liable for fines or repayment of any tax or PAYE contributions.
However, the good news is that the IR35 rules will not apply for small businesses of all types. Where small businesses are engaging contract workers through an intermediary, often known as an “umbrella” company, the responsibility for applying the IR35 rules remains with the intermediary: an intermediary can be a partnership, LLP or single person limited company, but the most common example is a personal service company or ‘PSC’.
So, what is classed as a ‘small’ business for off-payroll/IR35 purposes?
A business will always be small for its first financial year (of trading) and will continue to be treated as small until it fails to meet the requirements to remain small. Intrigued? The definition of what is a ‘small business’ is taken from the Companies Act 2006 and will apply to limited companies, LLPs, unregistered companies and overseas companies. A business will be small if it satisfies two or more of the following requirements:
- It has an annual turnover not exceeding £10.2m
- It has a balance sheet total of not more than £5.1m
- It had an average of no more than 50 employees for the company’s financial year.
To determine whether the small business exemption applies to a tax year, these requirements are applied to two consecutive financial years; the latest financial year where the filing date for the accounts ends before the beginning of the tax year and the financial year before that one.
Where two or more of these requirements are met for two consecutive financial years, the small business exemption applies and responsibility for applying the IR35 rules remains with the intermediary.
If the requirements cease to be satisfied, the business must apply the IR35 rules from the start of the tax year following the filing date for the second financial year.
Whether you are hiring one freelancer or multiple, the risk is the same. We can assist you in assessing your freelancer(s), whether they fall inside or outside IR 35 regulations and whether they are technically classified as an employee and would be subject to tax and NI as well as employee employment rights.