Are you a self-employed individual, a freelancer or employer? Have you ever wondered what your tax and status situation is with your company? If so, this podcast is for you.

Whether you are classed as self-employed or a worker has a major bearing on tax. Most importantly it affects how you are paid, and your obligations pertaining to paying taxes.

The two main ways that you will earn money in your life. Either as worker/employee or running your own business. You run your business as a sole trader or as limited company or mix and match them. Check out previous podcast episodes.

My focus for episode 56 of I Hate Numbers is personal service companies, and your status, and tax. Where your business provides services, for example training, accounting, consulting, IT then you have a personal service company. If you sell products, then you do not have a personal service company.

Listen to find out more!

Why your status situation with your company is important.

Firstly, why is it relevant. I don’t mean are you cool, an upright citizen. More importantly, status is about whether you provide your client services as a worker or self-employed. Is this a contract of service or a contract for services?

Above all, remember, this is a three-way relationship, nothing dirty mind you. You do the work; your company invoices your client, and your client pays your company.

The gig economy, high profile cases like Uber have been about worker or self-employed status. Uber ended up at the Supreme court, it did not go Uber’s way, and Uber drivers were classified where they had been previously considered to be self-employed. One consequence is more tax money to the government, and less for Uber.

Your status decides your rights responsibilities, and more crucially, how much tax the government will collect and who calculates and pays it. Status tests have been here for an age.   Calling yourself self-employed not going to cut the mustard.

In other words, if a contract for services, then your invoice is paid gross. In addition you have got greater opportunities for saving tax and tax planning.

Listen to find out more!

What does self-employed mean.

In normal everyday language it means working for yourself, being your own boss. However, we are not talking about normal folks, we are talking government and tax. There is no statutory definition of self-employment. Over the years case law has given us badges of trade. By badges, I am not talking about what you may get at school.

Listen to find out more.

What it is IR35 all about 

IR 35 deals with how tax applies if your company falls within its definition. What would the relationship between you and your client be if your company wasn’t there, worker or self-employed?.

IR35 deals with personal service companies, it has been with us in the UK since April 2000, other countries have similar.

The major change in IR35 is that there is no change in IR35. It’ a question of who makes that judgement call on your status. Public sector bodies have been making this decision since 2017. From the 1st of April 21 medium to large private companies now make that call, if your client is small you make that assessment.  If you want a more detailed look at IR35 then check our video, subscribe so you don't miss an episode.

Listen to find out more!.

What next

Your tax and status situation with your company impacts heavily on how much your earn and the tax you pay. Check your status using HMRC CEST tool. Moreover, treat with caution, there are flaws. Use our FREE online business and tax calculators to help make better business decisions.

Subscribe so you do not miss an episode of I Hate Numbers.. For more business and finance, news, advice and tips

Links

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You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

The two main ways that you'll earn money in your life will either be as a worker/employee, or running your own business. Hi folks. Welcome to episode 56 of I Hate Numbers, and my name is Mahmood. I've been running my own accounting firm for the last 26 years serving a wide variety of clients from solepreneurs up to limited companies with modest turnovers, ranging from four figures up to seven figure companies.

What I've seen over the years is what's really important for business owners like yourself is to up your money mindset, make profit in what you do, save time, and have the business that you are aspiring to have. This podcast is part of that mission, and in today's podcast episode, I am going to be looking at

the whole situation of personal service companies and particularly what I call status tests. Now, you might be asking yourself quite naturally why this particular topic. You may have noticed in the news we've had what's called the Uber case that's been recently completed at the Supreme Court. We've had the impact on that where Uber drivers are classified as workers with the indication where previously Uber, a US-based company considered their drivers to be self-employed.

Now, the Supreme Court has decided that those drivers are actually workers. You may be thinking to yourself, what's the relevance of that? Well, the nature of your status in providing services to an end client determines your rights, responsibilities, and also, more crucially, as far as the government is concerned, is how much tax will they be collecting and who will be collecting that tax.

In essence, if you are classified as what I call genuinely self-employed, when you invoice a client for your services, your client will pay that invoice in full, will not subject that to any deductions for PAYE or any employment taxes, and pay the invoice in full. If you are classified as a worker, however, and more particularly providing your services through the medium of a company, then your earnings, your fee will be subject to a piece of legislation colloquially called IR35 and effectively more tax will have to come off that income. More of that later

in this podcast episode. If we go back to you running your own business here, there are two main ways that most people will provide their services to a client. And when I say two ways, we're talking about your business structure. This has been covered and commented on in a previous podcast episode, and I'll share the link to that previous episode in the show notes attached to this podcast.

Now, the two main ways that you can structure, set up your business is typically as a sole trader. You do not have what's called a limited company structure. You are trading through or you establish a limited company. The rights and benefits and the advantages of that, we've explored in previous podcast episodes, and we're going to come back to that theme in the future.

But fundamentally, that's the two main ways that you can provide that. Now, the piece of legislation, I've alluded to, what's called IR35, is a piece of legislation which looks to treat the earnings from that service provided as effectively a salary, and if you are paid a salary, then you tend to pay more tax over for things such as PAYE,

national insurance. In addition, the employer will be deemed to have to pay employers national insurance. So, it can be quite costly in terms of the individual providing their services, but more particularly for the end client. More of IR35 later on in this podcast. Let's go back to the beginning and first of all, differentiate

this idea of what is a worker, what is an employee, and what is self-employed? Now, you may be thinking it doesn't actually matter. Well, it matters quite a lot, and what I will emphasise is calling yourself self-employed, your client calling you self-employed is not going to cut the mustard. It's all about the reality of the relationship between you and your end client.

Now, I will also point out, we're talking about service provision. So, if you are a retailer, if you're a manufacturer, if you're selling products, then these do not apply to you. We're only talking about services. Now, let's throw back a little bit. If you are providing services, whether it's training services, accounting services, consulting services, IT services, anything which does not involve the product

then if you are going through a limited company in legal terms, at the moment, your limited company is a separate legal beast, you are effectively on behalf of your company providing services to your own client. Most of the status conversations tend to say, if we ignore the limited company vehicle, what is the essence of the relationship between you

and the person that is using your services. Historically, this is either called a contract of service or a contract for services. Now, if it is a contract of service, effectively somebody is going for your individual services. If it's a contract of service, then an employment situation will arise, and when I say an employment situation will arise, that means that your invoice, your fee that you are charging your client will be subject to IR35 legislation.

Now, I've mentioned IR35 a couple of times. I will revisit this later on in the podcast, but subject to say, if the relationship is deemed one of service, then effectively you are going to have more tax taken out of that invoice. Now, if it says contract for services, then that invoice is paid gross and you've got much greater opportunity for tax mitigation, tax planning, and the like.

Now, it's worthwhile exploring that idea of contract of service and contract for service, and later on in this podcast, I'm going to be focusing specifically about the application of IR35, posted the 1st of April, 2021. We're not helped by the fact there is no definitive definition, no legal definition of what constitutes a worker, or more particularly, what constitutes somebody who is self-employed.

We've said that if somebody is classified as self-employed, the invoice that you write to that client will be paid in full. You have a wider variety of deductions you can make against that invoice and your greater scope for reducing any tax liability and reducing that perfectly legally. Remember claiming and saying, you self-employed, even if your client designates you as such, does not cut the mustard.

It's not about what you label yourself, it's about what's actually going on. Now, the essential characteristic of employment is a contract of service and self-employed workers is a contract for services. Let's have a look at what some of those conditions are and we said there is no statutory definition of self-employment. Over the years, through case law

and the like, there's been a variety of factors that have arisen that indicate overall whether somebody is actually a worker or whether somebody is genuinely self-employed. They are generically, colloquially, called badges of trade. Let me share some of those with you now. Now, if you have a contract of employment, a contract of service, and remember, the contract does not have to be in writing.

In most cases, in UK law and around the world, contracts can be implied based on behavior, past conduct, the nature of the trade. So, even though it's good business practice to have things in writing, a contract can still exist even though nothing is physically written as a contract. Now, a contract of service must contain an obligation of the part of the individual employee to provide your services personally.

Without such an obligation, the contract is not one of service. Now, some of the factors that have arisen over the years include a right of substitution. So, if you are unable to discharge your service for your own client, you may send somebody else to designate and provide those services on your behalf.

Now, if there is a right of substitution, that is a strong indicator of self-employment. If there is no right of substitution and your client will not counter against that, then that indicates more towards an employment relationship existing. Again, what it says in the contract is one thing. The tax authorities will tend to look at the reality of the situation if it ever comes up on their radar.

If you are taking risks using your own funds, you are working flexibly, you choose the place that you provide the work, you do the services, you can turn down work, you take on your responsibility, you have some degree of business structure, any mistakes that are made when you're providing those services, you put them right at your own expense.

Those are strong indicators of self-employment. So, for my own firm, for example, I will be engaged by clients to provide a wide variety of accounting, tax, management, accounting services. It's not critical. I may be the lead contact, but I have a team of individuals that support me and do some of that work with me.

I take my own risk. I invest my own money. Sometimes clients don't pay. Sometimes I give them the slack. Sometimes we will charged by the project. I buy the piece of work, and for me, then, I would not be an employee of that end organisation. That could be possible that an individual wants me to do some work for them, whether it's a mentoring or a training course.

Now, in that situation, the services I'm providing in that particular situation, if I only have one training client, if the client dictates what happens, how it happens, I'm using their materials, if I take no financial risk in what I'm doing, they pay for the development of those resources, they pay me by each day that I'm delivering services, then largely that would point to an employment situation that has arisen.

So, remember, these are not literally a tick box exercise, so one has to be very careful with that. We come now on the last part of this podcast to focus on the IR35 legislation. Now, effectively, the essence of personal service company legislation or IR35, to give it its colloquial term, is where an individual provides their services through an intermediary to an end client.

Now, the intermediary in the IR35 legislation typically refers to a limited company. So, if you, let's say, are in the IT industry, you have set up a limited company and that limited company provides that services to the end client, you are the shareholder director of that company, then the intermediary is your limited personal service company.

What they say is, take away that veil. Look at you as the individual providing those services to the end client, and what is the relationship? So, if you take no financial risk, you're paid for each hour, costs just as traveling to the client's premises, would not be seen as any degree of business risk. You don't really have any other clients.

You are carrying on working for that individual client. There's no break in that itself. You're paid by the day, no real financial risk. The client has control over what you do and how you do it, then that would be an employment situation and IR35 would apply. Now, I will emphasise, I'm using the terms employment here.

We're talking focusing on, yes, you do get some rights as a worker under IR35 legislation, but what will not happen is you don't get the full rights as an employee. What we're focusing on for IR35 is the tax that's taken off that fee. Now, post the 1st of April ‘21, it's now the client, and I'm talking about the private client,

who will have to make that assessment. The IR35 assessment test, historically, if you provided your services to a private-sector client, it's undertaken by you, post the 1st of April ‘21 to harmonise that with the public sector that's been doing this since April, 2017, your client, typically the recruitment agency they might be using is the one who makes that assessment.

If they determine that you are actually caught under the rules of IR35, that in reality you are a worker, then your fee will be subject to deemed payment calculation. In essence, what that means is that whatever fee that you have agreed with the agency will be subject to employer's national insurance.

So, immediately expect your fees to be reduced or pressures on them, and the employer's national insurance component can be as much as 12 and a half percent of that fee. You will also have your fee subject to PAYE and it'll be treated as a salary subject to national insurance as an employee and PAYE tax.

Now, a private sector client who does this will be typically a medium or large company, and typically it's two out of three tests over 50 employees, a balance sheet total of about 5.4 million, and turnover exceeding 10.4. So, if your end client fits two of those criteria, they will be making the judgment and effectively most of them will have a risk appetite that does not want to spend all that time and energy on a one by one,

and there will be a blank assessment. There is an HMRC tool, which I'll give you a link to at the end, called Cest, whereby you can feed in a number of answers to questions and it'll make an overall assessment. Treat the tool with caution. It's not a definitive guide, but it's one that a lot of our clients will be accepting.

If your incline is small, by the way, does not fit any of those criteria, then you have to make the assessment. So, IR35 is not going away, it's just who makes the judgment call. Now, so, let's get to the essence of this. If you do not want to be caught by the IR35 rules, if you do not want to see your services as being ones of service, but for services, there are a few things that you can do to take yourself away from that assessment.

Number one is get a wide variety of clients. So, if you're only working for one individual client and that doesn't stop, whether it's an admin, IT worker, somebody who works in the arts, then that will be an employment situation arisen, you are having a contract of service, and effectively your income should be subject to the IR35 rules.

If you negotiate your fees, if it's possible on a project by project basis, so you're earning per the piece of work and not by the hour of the day, that tips you more towards self-employment. If you have the right to turn work down and you have evidence of doing that, that obviously is a strong indicator of service.

Now, just to round up, if you are a sole trader, that question still arises. The essence is though, if you are a sole trader and your client pays your invoice in full without considering the relationship that might be developing, then if anything goes wrong, if HMRC decide that actually your relationship between you and your client is really, in reality, one of employment, and you have a contract of service, then the responsibility for the tax and the national insurance goes back to your client, which is why in lots of industries, they will not take on the supplier who does not operate through a limited company.

Okay, folks, I hope you found this useful. So, just as a quick roundup, a self-employment status is not for you to choose, and it's not for your client to choose. It's based on the reality of the situation. If you have a contract of service, then there will be more tax to pay, and compliance is both from your perspective and also your end client.

If you check out the show notes at the end, there's some links that we provided and also, to reinforce that, there's also a link to a wonderful calculator which looks at the cost of salary arrangement. Until next week, folks, have a fantastic week. We hope you enjoyed this episode and appreciate you taking the time to listen to the show.

We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.