So you want us to think you're self-employed?

Being freelance makes a huge difference to your tax position.
I recently had a meeting with a new client who described himself as a "Freelance Management Consultant working for a company called MW Southgate Limited". I asked him to describe his working arrangements with Southgate.

Client: Is there a problem?

AS: Well, there may be. From a narrow tax perspective, it's a contradiction in terms to be on the one-hand "freelance" whilst on the other "working for an organisation".

Client: Is it that important whether I'm treated as self employed or employed?

AS: Yes! If you are employed, tax and national insurance are deducted by your employer from your income each month. When you are self-employed, you may deduct your business expenses from your total income in arriving at the net profit to be charged to tax.

To claim deductability, expenses have to be incurred wholly and exclusively for the purposes of the business. In practice, the Inland Revenue will also generally allow a reasonable apportionment of certain expenditure where there is partial business use. You will then pay your tax and national insurance based on the net profit twice a year on 1 January and 1 July, although this will change somewhat under self-assessment.

Client: O.K. Well, I have an arrangement with Southgate to work for them two or three days a week depending on the assignments they have for me.

AS: Does this mean you go to their premises on those days?

Client: Does it really matter?

AS: Yes, it could do. The question of employment or self-employment can be a grey area. Whether or not you are truly self-employed will be very much dependent on the facts. It is not one of those areas that is set down in law, but has been subject to a number of decisions in the courts over the years. There are a number of key areas to explore.

Who exercises control over your work?

Who provides you with the tools, equipment and facilities to carry out your work? What level of freedom do you have in determining the way in which you go about carrying out the assignments?

What contractual arrangements do you have with Southgate? Is it a contract for services, or a contract of service?

Client: Hang on. I do have a contract for services. My arrangement with Southgate is that I must be available for up to 120 days a year to carry out assignments at their request. They set the assignment, such as a review of working practices in one of their factories, then it is up to me how I set about the assignment. In fact, I have got the facility within my contract to sub-contract that work to someone else should I want to.

I visit whichever one of six sites are appropriate in the course of my assignment. Once I have completed the site visit, I write a report summarising my findings and make whatever recommendations I see fit.

The company may let me use a spare office if there is one available when I am on site. In reality, I may use one of their offices to interview their staff or review their records in appropriate cases but that's about all. All the rest of it is down to me.

AS: Do you work for anyone else?

Client: I would like to! - 120 days' work a year is not enough.

AS: As things stand at the moment, I am quite happy about your self-employed status. No one attribute on its own makes the issue conclusive, it's a matter of looking at your position overall and forming a view. However, if you were to have contracts with another two or three organisations your position would be even clearer.

Client: Can I ask you about something else?

AS: Go ahead.

Client: I am very tempted to take up Southgate's offer of a company car. Is that all right?

AS: No! I would not recommend that at all. Acceptance of a "company car" could prejudice your whole status. Your relationship will become much more like that of employer/employee; you would be more closely associated with the company as opposed to working on behalf of the company. Although the provision of the car may not be wholly conclusive, it would make any dispute with the Inland Revenue much more difficult to resolve in your favour. Why would the company want to provide someone who is working for them on a self-employed basis with a "company" car?

Client: I get the message.

AS: In any case, your contract with Southgate entitles you to claim your expenses so you can invoice them for a mileage allowance. Although this would form part of your taxable income, all the expenses you incur in connection with running the car, including an allowance for the capital cost of the car, can be claimed against your profits. Of course, this has to be restricted to the business proportion out of the total.

Client: Fine. I did not really appreciate that. I can claim all my expenses against my income for tax then?

AS: To the extent that they are incurred for business purposes, yes. That would also include a reasonable claim for that proportion of your home expenses used in connection with your business.

Client: Yes, I do virtually all my report writing and research from home, where I have my computer and professional reference books.

AS: That's fine. If you could now let me have all the details of your income and expenditure over the year, I will prepare your accounts for you and discuss them with you. I know from our initial conversation that you're keen to put money into a pension plan and I will let you have an idea of how much you can put in when we meet. Of course, your pension premiums attract full tax relief.

The writer is a tax partner at accountants Kingston Smith.

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