It’s difficult being a small business that wants to expand. It seems that at every turn, we can be thwarted by rules and regulations.
One of the first that raised its ugly head was the question of outsourcing and the status of those freelance workers in relation to my business if I start to use them regularly. I can’t do everything myself if I want to start taking on sufficient clients to build the thriving local business that I envisage. I do want to take on proper full time employees eventually but the budget just won’t run to that at the moment.
I suspect that this is the point where people would say that I need to take out a business loan. However, I am not prepared to take on external debt – that way lies a pocketful of problems. My business has to be self-sustaining and, at a time, when small businesses are the lifeblood of this country’s economic future, it would be really nice to think that the Government could actually take on board this very important criteria and put some measures in place to help both the huge workforce that is tied into the title housewife and those potential employers who, in the future, would be happy to provide them with full time work.
I asked the lovely Sam Kettridge at Dormer Finance if she could give some guidance in establishing exactly when an outsourcer actually becomes an employee. But also what housewives and other people looking for a foothold back in the workplace should be doing in terms of establishing their role for tax purposes.
Employed or Self Employed?
The starting point would be to assess whether a worker is employed or self employed as it is not a matter of choice and it is the responsibility of the person/ business supplying the work to get it right.
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?
In addition to this, there are some special cases where there status is already decided by HMRC.
Tax (for tax year 2012/13)
Both employees and self employed workers are entitled to a Personal Allowance of £8105 (this is amount a person can earn before they need to pay income tax).
Tax is then at 20% on income from £8106 to £42475 and 40% thereafter up to £150,000.
Employed workers have this deducted from their salary monthly/weekly.
Self employed workers pay this over to HMRC on 31st January following the end of the tax year.
National Insurance (for tax year 2012/13)
Employed workers pay Class 1 NI. The first £7592 is at 0%, the next £34892 is at 12%. This is deducted from the employees salary monthly/weekly.
In addition to this the employer will need to pay Employers NI. The first £7488 is at 0%, then at 13.8% thereafter.
Self employed workers pay Class 2 NI regardless of income levels. This is £2.65 per week and can be paid monthly or quarterly by invoice or direct debit.
They will also need to pay Class 4 NI which is dependent on level of income. The first £7605 is at 0%, the next £34870 is at 9%.
Register for Self Assessment Tax Return
It is straight forward to register for Self Employment by calling HMRC or completing form CWF1 and sending it to HMRC.
Once a person has registered for Self Assessment they will then be issued a UTR (Unique Tax Reference) in the post.
This will then be needed to register for HMRC Online Services so that the worker can then file their Tax Return online.
Self Employed persons are assessed on the profit they make after tax deductible expenses. I.e. protective clothing, stationery, phone calls, mileage etc.
Each individual case is different and I would recommend that professional advice is sourced from an Accountant on each case. Here at Dormer Finance we offer a free no obligation first consultation which I would highly recommend for any employer or worker.
Whilst the information provided above is believed to be true, it is provided without acceptance by Dormer Finance Ltd of any responsibility whatsoever, and any use you wish to make of the information is, therefore, entirely at your own risk.
Samantha Kettridge FMAAT, FCCA, ACA
For my American readers, here is a similar rundown on the trend for virtual assistants and how they too could be considered employees.