How to: handle your tax and legal affairs so they don't come back and bite you

If you're anything like me, your primary focus is on doing your job whilst giving cursory attention to the 'back end' stuff like making sure your tax; legal and commercial affairs are in order.

When I first went freelance as a copywriter about five years ago the first, and probably the only thing on my mind was, 'where's my next assignment going to come from?'


Finding my way in the dark

Somewhere in between finding new clients and keeping existing ones happy, I remembered to tell HMRC I was now self-employed (I think a friend told me to do that) and I found an accountant in the Yellow Pages.

I told my accountant I was a freelancer. He told me that the government doesn't have a category for 'freelance', only employed or self-employed.  OK, said I. 

"You're probably best off as a sole-trader," he said. Again, I agreed.  Should I perhaps have incorporated as a limited company instead? I didn't have too much time on my hands to delve deeply into that matter, and I didn't really know where to look. I asked him a few questions, very much in lay-speak. Given that I'm not a figures person, some of his answers made me dizzy.

He muttered something about IR35, and that I needed to let him know if I only had one client, as that could cause some issue.

Basically I trusted him to sort it all out, so I could get on with delivering the goods to my clients. And that's what I carried on doing for quite a while, spurred on by the fact that clients liked what I was doing.


Shark-infested waters

It wasn't until recently, when I started working on assignments for the Professional Contractors Group (PCG) that I realised I'd been swimming in shark-infested waters, oblivious to the dangers.

PCG is the not-for-profit trade association protecting and promoting the interests of freelance consultants and contractors. It's a pressure group that believes the government shouldn't meddle by introducing legislation that hinders the freelance marketplace (which they have done on several occasions). It also provides a host of tools and knowledge to its members to help them handle tax and regulatory matters properly. 

Since becoming a PCG member I've learnt, for example, that HMRC conducts tax investigations on both freelancers and companies. Sometimes these are random investigations, other times they can be triggered by something you unwittingly do. People have claimed that asking an innocent question as a layperson has led HMRC to investigate them as a result of a misinterpretation. There are reports even on the forums of this site, of investigations being a pretty traumatic experience.


A more informed approach

I'm now much more aware of the things I need to get my basic structure in order. I realise I can get insurance to cover me against a tax investigation. I know that in some cases, insurance is not optional; it's a legal obligation. I understand the bizarre bits of legislation which can lead the government to claim you are not genuinely self-employed, but only 'pretending' (my words, not Gordon Brown's). I know to use the right contracts and procedures to avoid the embarrassment of a client being presented with a tax bill for having 'employed' me, even though they thought they were hiring a freelancer.

As the person reading this, you may be freelance already, either operating as a sole trader, or even a partnership or limited company. Equally, you might be considering the step into freelance journalism. Either way, if any of the above is new to you, I think it's worth prioritising some time out of your schedule to review where you stand in relation to these 'back-end' issues.

So in hindsight, here is my view of a solid way to approach the business affairs of a freelance operation. Some I would have done a lot earlier, had I known the significance.  Others, I'm about to do:


Take the time to understand tax and legal affairs

Ignorance is anything but bliss if you are called to account. HMRC puts the onus of responsibility on the individual. Even if you have good advisers, you must understand the implications of the advice, as the buck ultimately stops with you.

Advice from HMRC can be found here. This will talk you through the process of registering as self-employed and whether you need to register for VAT. There is also a section that discusses employment status - you might think you're self-employed, yet HMRC might view you as an employee, so read carefully.

PCG publishes a guide to freelancing that can be downloaded free of charge at www.pcg.org.uk/guidetofreelancing. This will give you independent advice on the routes available to you and includes explanations about IR35 and employment status.


Join PCG

As well as giving you a representative voice in government, the trade association is your independent source of tax and legal advice: via helplines, guides and member forums.As well as giving you a representative voice in government, the trade association is your independent source of tax and legal advice: via helplines, guides and member forums.

By joining as a member you are covered under PCG's Professional Expenses Insurance policy (PEI) if you get the dreaded tax investigation. If you have PCG Plus membership you are also covered for the cost of an audit.  

The minute you receive a worrying communication from HMRC, you get on the phone to PCG, who will put you in touch with their tax people to handle the process. This is vital, as it avoids you unwittingly saying or writing the wrong thing that could make your life a misery.

Members also have access to a wealth of contract templates that contain clauses worded specifically to avoid problems with HMRC, such as being IR35 caught, which would result in you having to pay more tax. 

If you are a sole trader or thinking of becoming one, PCG Solo is the membership package tailored for you. It also includes insurance to pay you £300 per day for up to 10 days if you are called up for jury service. More information about PCG Solo is available here: www.pcgsolo.org.uk/journalist.

Alternatively you might be thinking of setting up a limited company, in which case PCG offers a membership package that takes you swiftly through the whole process in full compliance with the regulations. It's called PCG OneStop and the information is available here: www.pcgonestop.org.uk/journalist.

If you don't use an accountant think about getting one. PCG has a list of accountants who specialise in freelancing matters. You don't have to be a member to access this list: www.pcg.org.uk/qa.

If you're a sole trader it's a really good idea to use an accountant to submit your annual tax returns, and also your VAT if applicable. HMRC will view your accountant as your 'agent', which is one further step towards convincing HMRC you're doing everything possible to deliver accurate and verified information.

If you operate via a limited company, you are obliged to have your books audited, so you'll definitely need an accountant qualified to do that.

Choosing your accountant is an important decision, and ideally should come recommended rather than 'cold'. 


Make an informed decision on your business structure

This means reviewing your current tax status and deciding whether you would be better off with an alternative structure, choosing between sole trader, limited company, partnership, or any of the other eccentric structures I didn't even know existed.

If you are currently operating as a sole trader, for example, it might be more tax efficient for you to set up a limited company. 

Limited companies do involve more admin and paperwork. Your accountant can handle the bulk of this, but you should ask your accountant to do a comparison based on your average or anticipated earnings to establish whether the tax saving would be greater than the cost of running a limited company.

Incidentally, it's probably best to avoid any kind of offshore arrangement except in very exceptional circumstances. HMRC has offshore companies very much in its sights and there is unlikely to be any benefit gained from setting one up if you live and/or earn in the UK.

In short, my view is this; ask your accountant to work out the best route, but make sure you understand the answers.


Get insured

Employer's liability is a legal obligation for limited companies that employ people.  The concept of 'employing' someone is much wider than you might think. You may fall under the obligation if you contract people on a casual basis, or even if you pay yourself a salary out of the company. It's best to check if you need it.  Find out more at: www.pcg.org.uk/insurances

Professional Indemnity is also important, as anyone writing articles, however innocuous they might seem, is exposed to the possibility of libel or a mistake they could be sued for.

Imaging Insurance offers NUJ Members a custom designed Professional Indemnity and Public Liability Insurance policy, as well as covering writer's equipment, business and household items.  The policy is called 'Writers' and the info is available at www.imaginginsurance.co.uk/writers.html

If you're going out on assignment, Reporters Without Borders has put together a very comprehensive insurance policy for journalists and photographers that can also be extended for war cover.  More info at: www.rsf.org/IMG/pdf/Insurance_policy.pdf

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