For many people their employment status will be clear, they will either be self-employed or an employee. However, for some people the distinction between employment and self-employment is muddy, along with your tax obligations.
Some businesses who employ contractors and freelancers may treat those they hire as self employed rather than as an employee in order to avoid operating Pay As You Earn (PAYE), which costs them more money. If HMRC become aware that this is the case, they will go after both the employer and employee for the missing tax payments due, and are increasingly adding pressure to businesses to operate fully with employment law, with IR35 regulations being introduced to the private sector from April 2020.
HMRC have created an online tool to help employees and employers to determine tax status, called the Check Employment Status for Tax tool (CEST). The tool runs through a series of questions online and at the end of questioning, gives an indication of your employment status for tax purposes. Unfortunately, the CEST tool is notoriously hard to complete, due to the complex technical language used, and does require potentially some professional support to use correctly.
What are your tax responsibilities if you are self-employed?
If you are self-employed, you are responsible for advising HMRC of your earnings and also for paying income tax and National Insurance contributions. The steps you will need to take to ensure you are operating legally are:
Some business sectors, such as the construction industry have special tax rules and require additional registration.
How and when should you advise HMRC you are self-employed?
By law, you must register your self-employment with HMRC because you will be responsible for paying income tax and National Insurance contributions based on the profits from your business.
You will need your National Insurance number to hand when you are registering as self-employed, which you can find in previous HMRC correspondence or payslips or via your personal tax account with HMRC online.
Once you start trading you should register with HMRC as soon as possible and no later than 5 October after the end of the tax year in which you started your self-employment. You could be penalised if you do not register.
What happens once you have registered?
Once you have registered with HMRC, you will receive a Unique Taxpayer Reference number or UTR You will need the UTR to complete your Self-Assessment Tax Return and for any correspondence with HMRC. If you have already registered for a UTR number previously and it is now inactive, HMRC will re-activate the same number for you to use again, rather than issue a new one to you.
Once registered, HMRC will also send you a notice to complete a Self Assessment tax return for the tax year in which you started your business.
Southside Accounting are Self Assessment Tax Return Accountants
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Written by Shaima Todd.