What Lorraine Kelly's tax victory means for freelancers and small businesses

Not all freelancers may be as lucky as “TV persona” Lorraine Kelly when dealing with HMRC. Check your IR35 status carefully, says David Prosser.

940-Lorraine-Kelly
Lorraine Kelly

Not all freelancers may be as lucky as "TV persona" Lorraine Kelly. Check your IR35 status carefully, says David Prosser.

Lorraine Kelly isn't the most obvious hero for small businesses providing contracting services, but the television presenter's victory in a landmark tax case is being widely celebrated. Kelly has succeeded in overturning demands for £1.2m of back taxes from HM Revenue & Customs (HMRC) after convincing the courts she isn't an employee of ITV, but a contractor who is entitled to sell her "TV persona" to the broadcaster through her limited company. For businesses worried about the often tortuous IR35 tax rules introduced almost 20 years ago, that's a big win.

The ruling underlines how high the stakes can be for freelancers and contractors that set up small businesses in order to offer their services to customers. Since working in this way often has certain tax advantages a potential income tax and national insurance saving for the company itself and its customers the Treasury has long suspected some people are playing the system to avoid tax.

There have been several attempts to crack down on such practices in recent years and more reforms to come with HMRC's IR35 regime sitting at the heart of the system. Using IR35, HMRC targets "disguised employees" people it believes have set up small businesses in order to save tax when working for customers who could just employ them. Not only can HMRC require these people to change their status, but it can also demand payment of back taxes. The problem, however, is that there is no set definition of a disguised employee. HMRC's inspectors look at each case individually and make an adjudication based on their own judgement.

This can make it difficult for freelancers and contractors to be sure they're on the right side of the IR35 rules. Plus, the Treasury has upped the ante recently. Any public-sector organisation contracting with a limited company must now assess whether the contractor is actually a disguised employee. If so, they must be taxed as if they were normal employees, with costs for both the employer and the contractor. This requirement, which HMRC hopes will reduce the number of people working "off-payroll", will be extended to most of the private sector in April 2020.

So it's essential that anyone running a limited company reviews their IR35 status carefully. While there is no fixed rule on who is and isn't caught by the regime, asking certain questions will help you plan. For example, do you have control over how, when and where you work? Do you have to do this work yourself, or could you ask someone else to do it in your place? Does your client have to offer you work and do you have to accept? Are you an essential part of your client's organisation? Does it provide the equipment you need to work? Do you get sick pay, holidays or bonuses? The more of these questions you can say no to, the less chance there is of HMRC ruling you're actually a disguised employee. In the meantime, the tug-of-war between HMRC and contractors will continue.

Go solo instead?

However, sole trader status is simpler. You'll manage your tax through the self-assessment system, with no need to file company accounts or complete corporation tax returns. You may be able to do without a professional accountant, saving you money on fees.One potential clincher is that large companies prefer only to deal with other corporate entities, which may make it more difficult to win work from them if you're a sole trader.

Recommended

Small business: how to chase late-paying customers
Small business

Small business: how to chase late-paying customers

Many small business have trouble getting their customers to pay up on time. Here's what you can do about it.
23 Jan 2020
What are the best ways of raising more money in tax?
Economy

What are the best ways of raising more money in tax?

Given that whoever wins next week's election will be going on a massive spending spree, we're going to need to raise at least some of that money throu…
5 Dec 2019
What are the biggest mistakes investors make when it comes to tax?
Investment strategy

What are the biggest mistakes investors make when it comes to tax?

The tax implications of an investment are something we rarely consider until after the event. That could prove to be an expensive mistake, says Domini…
27 Nov 2019
How tax has shaped the course of human history
Economy

How tax has shaped the course of human history

Taxation is as old as civilisation itself. But how much is too much? Dominic Frisby looks at how taxation, war and society have evolved together over …
16 Oct 2019

Most Popular

Here’s why you really should own at least some bitcoin
Bitcoin

Here’s why you really should own at least some bitcoin

While bitcoin is having a quiet year – at least in relative terms – its potential to become the default cash system for the internet is undiminished, …
16 Sep 2020
Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020
James Ferguson: How bad data is driving fear of a second wave of Covid-19
UK Economy

James Ferguson: How bad data is driving fear of a second wave of Covid-19

Merryn and John talk to MoneyWeek regular James Ferguson about the rise in infections in coronavirus and what the data is really telling us.
17 Sep 2020