In this guide, we are focusing on your employment status for tax purposes. IR35 is legislation that was introduced to recoup tax revenue that is lost when freelancers and the self-employed fail to register as employees of another business. The HMRC can take a dim view of parties who fall foul of this legislation and they have the right to investigate and penalise freelancers and the self-employed as well as the companies they work for.
How do I know if I'm self-employed?
Often, the lines between being self-employed and an employee can be blurred. As such there’s no hard and fast definition of what makes someone self-employed. It’s more of a balancing act, tip the scales too far and HMRC may take the view that you’re an employee.
There are some general rules of thumb to help you determine whether you will qualify as self-employed:
• Your right to appoint a substitute: If you have agreed to work for a client but you have the right to send someone else to carry it out in your place.
• Being able to work for others: Unlike traditional employee/employer relationships that insist on exclusivity, self-employed individuals can work for as many clients as they want (just make sure this doesn’t lead to a deterioration in your services).
• Equipment: An employee would expect their employer to provide all the equipment they needed to perform their role. On the other hand, a self-employed individual would be expected to provide much of their own kit.
• Responsibility: A self-employed individual may be expected to take responsibility for their work and if necessary, make good any mistakes or errors at no additional cost.
If you’re still unsure, the HMRC have put this tool together to help you [check your employment status for tax purposes] (https://www.gov.uk/guidance/check-employment-status-for-tax).
How do I register as self-employed?
First and foremost, you must register with HMRC. The deadline for doing so is the 05 October following the end of the tax year. In other words, the 05 October in your business’s second tax year.
Your self-employed income is subject to tax and national insurance contributions (NIC), but crucially, no deductions of this type will have been made before this income is paid to you. As such, it’s up to you to report and make the necessary payments to HMRC, this is what’s known as self-assessment.
N.B. There are penalties and late-payment interest charged for businesses that fail to register on time. So you should make this a priority. If you’re a new business registering for the first time, you can do so online, by post or over the phone
You might also need to consider whether you will need to register for VAT (Value Added Tax). See our VAT guide for more information.
What happens after I register?
Your registration lets the HMRC know to issue you with a notice to complete a self-assessment tax return. This notification should be received shortly after the end of the tax year (April 5) either by post or electronically, depending on how you registered.
Likewise, your return may also be completed online via the HMRC, through the post with paper forms or by using a third party, like a tax accountant or a commercial software solution.
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