Gary Lineker’s £4.9 million legal battle with HMRC came to an end last Friday. In this long-running dispute, the former Match of the Day host was investigated over his income tax from the BBC and BT Sport between 2013–2014 and 2017–2018. HMRC claimed that Lineker was an employee of both broadcasters rather than a freelancer.
While self-employment has its benefits, it also comes with challenges. Experts from Tax Accountant have outlined five actionable tips to help freelancers and contractors avoid tax pitfalls when submitting their Self Assessment this January.
Understand your working status
Being self-employed doesn’t always mean working for multiple clients. It is possible to be employed full-time (via PAYE) and operate a side business or be self-employed while working full-time hours for just one company.
Moreover, your IR35 status can change depending on the clients you work with. IR35, or the off-payroll working rules, was introduced by HMRC to ensure that contractors or freelancers pay similar income tax and National Insurance contributions as employees when working as such, even if an intermediary company is involved.
Since April 2021, the responsibility for determining a contractor’s IR35 status lies with the client in most cases, except for small private sector businesses, where contractors decide for themselves. A contractor can still be self-employed but fall within IR35, which means they would be considered employed for tax purposes only.
Some ways to determine your IR35 status include having the right of substitution (where someone else can do the job for you) and flexibility in working hours. It also helps to demonstrate business-like traits, such as having a company website, to further support a self-employed status.
Clear and transparent contracts
Freelancers and contractors must ensure that their contracts accurately reflect the true working relationship between all parties. This is crucial because, in the event of an HMRC investigation, the focus will be on whether the actual working relationship aligns with the terms of the contract.
Contractors should request that their clients issue a well-documented Status Determination Statement (SDS) outlining the IR35 status decision and its justification. It’s also important to craft contracts that highlight independence, especially to stay outside IR35, and avoid language that suggests control, supervision, or direction from the client.
Don’t forget to factor in National Insurance Contributions (NICs)
Understanding your NICs obligations is also vital, as they are mandatory contributions, and the amount you pay depends on your business structure. There are two main categories for freelancers and contractors:
- Class 2: Flat-rate contributions paid by sole traders or self-employed individuals
- Class 4: Based on profits (for sole traders)
It is important to note that if you are employed by a company and have your own side business, you will also have to pay Class 1 (it will be directly deducted by your employee) but this will be deducted by your employer and paid through the PAYE system.
NICs should be factored into your tax planning and budgeting as they vary based on profit or salary levels. It is advisable to estimate your expenses annually and plan for future benefits. Additionally, creating a separate fund specifically for NICs will ensure you have the necessary funds to pay them when due.
Handle VAT thresholds
Freelancers and contractors must register for VAT once their turnover exceeds £85,000 in a 12-month period. If your business is nearing this threshold, regularly monitor your income and register before exceeding the limit. You can always deregister for VAT if your turnover falls below the threshold.
Failure to register within 30 days of surpassing the threshold can result in penalties and backdated payments from HMRC.
Small businesses with a turnover below £150,000 (excluding VAT) can use the Flat Rate Scheme (FRS) to simplify VAT reporting, paying a fixed percentage of turnover to HMRC rather than calculating VAT on individual transactions.
Meticulous records of business activities
Maintaining organised and comprehensive records is essential to ensure compliance with HMRC regulations and to provide a defence in case of an audit, penalties, or disputes.
Along with clear and transparent contracts, freelancers and contractors should retain important communication records (such as evidence of negotiations), timesheets and work logs (to demonstrate time spent on each client, where applicable), and invoices with proof of payment (which establish a commercial relationship and provide a clear trail for tax filing).
This can be done by using low-costs or even free solutions, such as Google Drive or Microsoft OneDrive accounts.
Aatif Malik, Director of Tax Accountant, commented:
“Being self-employed can overwhelming at times, as it involves not only doing your job but also managing every other aspect your business, and it’s easy to overlook critical tax obligations. However, one tiny mistake could lead to fines or HMRC investigations, which are ultimately even more stressful and costly. Taking the time to fully understand your responsibilities to ensure compliance, organising documents and records, and maintaining transparency in your contracts and processes are key to keeping your business healthy and avoiding unexpected setbacks.”
