Tax problem - working as freelancer, but treated as employee

monkey_writer

Hello, this isn't really a tax cutting question - more of a where do I stand question - any advice greatfully received.

When I started working for my employer we agreed it was to be on a freelance basis, but now I have realised that I should have been an employee. When I found the criteria for an employee (below) it was quite clear to me that they just wanted to get around all their responsibilities towards me as an employer. I can answer yes to all the employee criteria and no to all the freelancer criteria.

I work 3 days a week. I have a desk and a computer supplied for me in their office. I have set hours that I have to be at work and I do exactly what they tell me to and when they tell me to do it.

I am paid per hour and have no sick or holiday pay. They put up a great fuss every time I try to take holidays or time off but are always expecting me to come in extra days.

I only very rarely work for other employers, and earn very little from these. I pay NI contributions as a freelancer.

I have been declaring my tax, but until now have not earnt enough to have to pay anything. This year (because of this job) I will have.

Does anyone know what my situation here is? Should they have put me on the books, been paying my NI, tax and sick, holiday pay?

What would happen to me and to them if I talk to the HMRC about this?

I don't mind getting them into trouble - they have been really difficult to me, and have also put several other people in the same situation.

Thanks for your time!

Quote:
As a general guide as to whether a worker is an employee or self-employed; if the answer is 'Yes' to all of the following questions, then the worker is probably an employee:

• Do they have to do the work themselves?
• Can someone tell them at any time what to do, where to carry out the work or when and how to do it?
• Can they work a set amount of hours?
• Can someone move them from task to task?
• Are they paid by the hour, week, or month?
• Can they get overtime pay or bonus payment?
  
  If the answer is 'Yes' to all of the following questions, it will usually mean that the worker is self-employed:
• Can they hire someone to do the work or engage helpers at their own expense?
• Do they risk their own money?
• Do they provide the main items of equipment they need to do their job, not just the small tools that many employees provide for themselves?
• Do they agree to do a job for a fixed price regardless of how long the job may take?
• Can they decide what work to do, how and when to do the work and where to provide the services?
• Do they regularly work for a number of different people?
• Do they have to correct unsatisfactory work in their own time and at their own expense?

Lifeisbutadream

monkey_writer wrote: »

I don't mind getting them into trouble - they have been really difficult to me, and have also put several other people in the same situation.

Thats nice! :rolleyes: see here

http://forums.moneysavingexpert.com/showthread.html?t=529390

for how it feels to be on the other side of this situation.

Can I make a suggestion? dont work for them any more if you dont like them.

I can only speak from experience, but if we had to pay all our contractors sick and holiday pay, we wouldnt have a business.

walkonwater

Can you subcontract the work, or do they expect you to do it? If you do a particularly good job, will you benefit financially in terms of a share of profits etc? If you do a crap job do you stand to lose anything financially?
It does sound as though you should be treated as an employee, especially if you also answer no to the questions above. This being the case your earnings should have been paid through the payroll and had PAYE (tax and National Insurance) deducted from it on a monthly basis. The "employer" must also account for employers NI on amounts paid to you over £100 per week. I assume you have not claimed any deductions for expenses in prior years and therefore appear to have no problems for tax purposes. However, the employer, strictly speaking, remains liable for the PAYE whether you have paid the tax to them or not. I would suggest you speak to HMRC on a "no names basis" to understand your position better. Then approach your "employer" and let them know the situation. You will both be able to make a decision then as to whether you continue your working relationship. But remember, as an employee you are unable to claim expenses against your earnings, so you may want to build that into any negotiations going forward.

monkey_writer

Hello Walkonwater, thanks for your response. In answer -

Q. Can you subcontract the work, or do they expect you to do it?
A. I can't subcontract. I am expected to do it.

Q. If you do a particularly good job, will you benefit financially in terms of a share of profits etc? If you do a crap job do you stand to lose anything financially?
A. No to both.

I have previously claimed expenses, which brought my taxable income down to zero. But last tax year (2005-2006) I only earnt a small amount from this employer - under the taxable limit. I have to declare my income for tax for 2006-2007 by the end of the calender year (not sure exact date) so for that year I haven't claimed expenses or declared income yet.

What would happen if the HMRC decided that they should have been paying PAYE? Would they then have to pay it and I would declare my income from them as income taxed at source?

walkonwater

You have to file for 2006/07 by 31 January 2008.
So in previous years, were you working for this employer and claiming expenses against your income? If so, and you should correctly be treated as an employee, you may have the expenses disallowed and therefore triggering a tax liability for earlier years. More likely though, if HMRC find out, and it is a decent amount - worth their while pursuing - they would chase the employer for the underpaid taxes from earlier years. If it is not worth their while they might just ignore it, though it could also open the company up to the possibility of a PAYE audit, which can be costly for them if there are more "freelancers" such as yourself. From your persective you need to ensure you are straight with HMRC as these things have a nasty habit of coming back to bite you. Don't forget, if you remain a "contractor" you will at some point have your affairs audited by HMRC, at which point it will all come out so you're better getting it straight now. So cover your own butt so to speak, as right now it sounds like you have nothing to worry about personally.

swanny65

Lifeisbutadream wrote: »

Thats nice! :rolleyes: see here

http://forums.moneysavingexpert.com/showthread.html?t=529390

for how it feels to be on the other side of this situation.

Can I make a suggestion? dont work for them any more if you dont like them.

I can only speak from experience, but if we had to pay all our contractors sick and holiday pay, we wouldnt have a business.

Thats harsh......

Speaking from experience, and judging from the number of self employed queries from other members on here who are not in anyway self-employed but employee's misled by their employer into being self employed, Monkey Writer has a perfect right to feel agrieved - no sick pay no holiday pay and the employer saves paying the employers NIC.

Unfortunately you may have made a costly mistake, my brother ended up with a £10000 tax bill in similar circumstances to yours a few years ago. However by and large most employers know whether the person working for them is employed or S/E and a minority try it on and, in my opinion, rightly, suffer the financial consequences if found out.

In your case if you have always been upfront eg paid tax NI VAT on time etc one would like to think HMRC would be sympathetic.

linlin_3

How long has it been since they last had a PAYE audit? Perhaps you should spell it out that in order to save them, you're going to work flexible hours in future, to suit you. You should be invoicing and getting paid within a time limit. Any future projects should be discussed with you and estimated by you, in writing and clearly agreed, in writing. You can use that to increase your hourly rate. If the kind of work you do can be done from your home, tell them that's going to be part of the future deal.
They can't have their cake and eat it - it's quite serious stuff.
On the other hand - as a self employed person, while you do have rights, you don't get sick pay or holiday pay. If you were to report them, don't expect to benefit personally - you wouldn't get back holiday/sick pay.
Find other work!

Lifeisbutadream

swanny65 wrote: »

Thats harsh......

Speaking from experience, and judging from the number of self employed queries from other members on here who are not in anyway self-employed but employee's misled by their employer into being self employed, Monkey Writer has a perfect right to feel agrieved - no sick pay no holiday pay and the employer saves paying the employers NIC.

Unfortunately you may have made a costly mistake, my brother ended up with a £10000 tax bill in similar circumstances to yours a few years ago. However by and large most employers know whether the person working for them is employed or S/E and a minority try it on and, in my opinion, rightly, suffer the financial consequences if found out.

In your case if you have always been upfront eg paid tax NI VAT on time etc one would like to think HMRC would be sympathetic.

Do you know what - it may be harsh, but I am really really fed up of people assuming that because you have your own business, then you must be rolling in it.

Perhaps the business owner has no idea that they should be paying PAYE? perhaps they simply cannot afford it and consider that they would rather keep people in work than the alternative of 'letting them go'.

Holiday and sickness pay is all well and good if you have a huge business with a huge cashflow, but when you are only making enough profit to feed your own family, and working 124 hour days/7 days a week for the privilage of it, it starts to feel a little bit painful if you are paying a sub-contractor more than you are getting yourself.

I also think it is harsh to say that your brother got a £10000 tax bill doing 'something similar' to what I was doing. You make it sound as though I am a tax dodging criminal!

I pay my taxes, I pay my VAT, anyone that we contract work to pays their taxes. We are a very small business, working very very hard. I was merely pointing out that if someone wasnt happy working for someone, they should leave.

One day this person may have the boot on the other foot.

RayWolfe

When I last heard, tax evasion was illegal. Treating employees as "contractors" is tax evasion.

Lifeisbutadream

RayWolfe wrote: »

When I last heard, tax evasion was illegal. Treating employees as "contractors" is tax evasion.

Do you work for the tax office by any chance? :rolleyes:

See my above post where it says that it bugs me when people assume that everyone with their own business is rolling in it.

Bean_Counter

monkey_writer wrote: »

Does anyone know what my situation here is? Should they have put me on the books, been paying my NI, tax and sick, holiday pay?

It seems to be accepted based on the information here that you should be treated as an employee, you should have been on the books, they should have been deducting NI & income tax and should have been entitled to sick pay, holiday pay etc.

On the positive side, it is the employers decision to get job status correct, and HMRC would come after them rather than you for any lost tax etc, so I wouldn't worry about that side of things.

I presume that the employer did this to avoid paying you sick pay / holiday pay and avoid employers NI at 12.8%. Do you receive a higher amount on a 'freelance basis' than you would if you were paid employee? I certainly hope it is a significant amount higher.

As for the next step, the advice that walkonwater gave seems a reasonable way forward.