Question, I am a self employed sole trader providing graphic design services to a range of clients. My business has grown well over the last few years and I am now looking to take on a bit of help from other freelancers on some of my projects. Can I claim these costs as a business expense and are there any other issues to be aware of?

 

Sole trader engaging subcontractor

Answer:

If you engage a subcontractor to perform a piece of work for your business then as long as it is entirely for business purposes then this cost will be an allowable expense, therefore reducing your taxable profit.

However you must be careful to ensure you don’t get caught by any employment status issues – you need to make sure they are a genuine self employed subcontractor rather than an employee, otherwise you will have to treat them as an employee which brings with it not just the tax and national insurance complexities but also other issues such as employment rights.

Just because you treat them as a subcontractor doesn’t mean you aren’t exposed to employment status issues further down the line with HMRC so it’s important to get things right up front.

Employment status is a bit of minefield and can change as new tax cases come along.

The first step is to make sure they issue you an invoice for the work they are doing and ideally on this invoice it should quote their tax reference.

Secondly we would highly advise that you put a contract in place between your business and the freelancer which outlines the services they will be providing as well as other contractual details.

This contract should cover the key indicators of self employment, including:

  • Mutuality of obligation – this means that the subcontractor can choose to turn down or accept any work you offer them and also that you are not obliged to offer them work
  • Control – the more control that the subcontractor has over the work they do, the better
  • Personal service – although you are engaging a subcontractor to provide a specific piece of work for you, they should be allowed to bring in outside assistance or subcontract out some of the work themselves – they should pay these people directly themselves rather than you
  • Financial risk – there should be an element of financial risk on the subcontractor – for example if they have to sort out some problems with their work this should be down to them
  • Length of contract – self employed subcontractors are usually engaged on a short term contract – open-ended or long running contractors veer towards employment rather than self employment

These are just some of the key indicators of self employment, if you engage a solicitor to draft the contract ask them to make sure it covers off the main employment status issues.

You could also check out some of the online resources that supply template self employed contracts, for example at Simply Docs or Net Lawman.

Beyond the contract it is important that the reality of the relationship really is one of self employment – it is all too easy to work with someone on an ongoing basis as self employed and over time they can become part and parcel of your organisation – this is something HMRC would look at during an employment status investigation.

You should also be aware of a specific part of employment status called the ‘intermediaries legislation’ or more commonly known as IR35.

These are specific rules that apply to those who supply services to clients via an intermediary, such as a limited company – as you are a sole trader, IR35 would not apply to you directly , however if some of your subcontractors supply their services via a limited company, for example, it would apply to them and is something for them to consider.

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