on 2 April 2004Honing your skills and marketing your talents is all very well, but a freelancer’s most important task is making sure money comes in from clients and the right amount of it goes out to the tax man.
Starting out
The simplest legal basis for working as a freelancer is to be a ‘sole trader’. Essentially, this means you just get on with it. Any money you earn is classed as personal income, and at the end of each financial year your tax return adds this up, subtracts any legitimate business expenses, and arrives at a figure on which you’re taxed in much the same way as if you were an employee. You’ll pay a lot more National Insurance, though, so it’s vital to work out your NI contributions (NICs) when predicting how much money you’ll end up with in your pocket. Tax is usually paid by instalments twice a year.
All you have to do to become a sole trader is register with HMRC as self-employed. You can do this by calling 08459 15 45 15 or by completing and posting the form available from the HMRC website. You’ll need to know your National Insurance number. If you start working for yourself without doing this, you could be fined £100 when the Revenue finds out.
According to the tax rules, anyone who spends most of their time working for one company is considered an employee. You can find out more about this on the HMRC website. The bottom line is that you must avoid working predominantly for one client, otherwise things are liable to get more complicated and expensive for you both.
There are special tax and/or National Insurance rules for certain industries, and if any of your work is in education, construction, entertainment, film or TV, you need to check these out.
You’ll get a self-assessment tax return at the end of each financial year (April) which doesn’t have to be completed until September, if you want the Inland Revenue to calculate your tax – which you do, unless you’re a tax expert – or January, if you work it out yourself. Getting an accountant to do this will cost a few hundred pounds, but could well pay for itself, as they’ll know the tax rules better than you. Make sure to choose an accountant that specialises in your area of business.
The main problem with being a sole trader is that you’re personally liable for your business debts. If things go horribly wrong, you can’t go into liquidation and walk away – you have to pay your creditors out of your own pocket, or go bankrupt. For creative freelancers, this isn’t usually too much of a risk, because you’re not constantly putting money in to buy raw materials or pay staff. There are certain liabilities that may arise, though – more about these in ‘Liability knocks’, below.
Getting paid
Writing ‘Please pay within 30 days’ on the bottom of your invoices is fine as a reminder, but doesn’t alter the contract (whether explicit or implied) that was made between you and the client when you took on the work. The time to agree terms is when you first accept the commission. The standard legal assumption is that you’ll be paid within 30 days of completing the work, and you could mention this as your ‘terms’, either verbally or in the email or fax you send to accept the job.
Some clients will state different terms in a contractual agreement they send you when they first commission you. Contract terms that restrict your right to prompt payment, or the interest and costs you can claim (see below), are only legally valid if they also provide some alternative ‘substantial remedy’ if the client fails to pay on time. And the client can’t give itself a credit period ‘significantly different from custom and practice in that industry’.
Unfortunately, custom and practice are rarely on your side. General practice is to pay at the end of the month after your work was completed, which can mean 60 days’ wait. Most editorial clients aim to pay within 30 days of publication. That’s fine for daily newspapers, but a long wait if you’re working four to ten weeks in advance for a monthly magazine. Advertising agencies and other businesses are unpredictable in their habits.
Bear in mind that the person commissioning you won’t usually be paying you. Accounts departments are a law unto themselves, and even in reputable companies they’re rife with formal, informal, overt, covert, and sometimes plain illegal schemes to avoid paying suppliers for as long as possible. Frankly, we don’t know how these people sleep at night, except on deep, comfortable piles of cheques that have been duly issued on the last day of the month, signed off by the finance director a couple of weeks later (busy man, you know), and will be mailed out, second class, when someone gets round to it.
Late payment
When someone is late paying, the law says you can charge them interest. The allowable rate is the Bank of England base rate on the previous 31 December or 1 July, whichever is most recent, plus 8 percentage points. At the time of writing, this comes to 12.5% - a tenner a month on a debt of £1000. You can also charge debt recovery costs of £40 for debts under £1000, £70 for up to £10,000, or £100 for larger amounts. You’ll be lucky if this covers the interest rate on your overdraft, let alone paying for your time and effort in chasing the payment, but there you go.
If you intend to impose these charges, inform clients first, ideally before the issue arises. Pretty obviously, you’ll want to think twice before applying them to clients you hope to work for again. The most important thing is to keep chasing any outstanding payment and regularly assess whether it’s simply late or is not going to happen. If there’s any apparent risk that the client may be going out of business, the time to take action is sooner rather than later: in a liquidation, a small creditor like you won’t even get the bones to pick clean after the banks and the Revenue have finished their feeding frenzy.
Suing somebody isn’t as complicated as you might think - you can find out more, and even issue a claim, online. If the amount owing is less than £5000, it’ll be handled by the ‘small claims track’, meaning costs are relatively low. If you win, your court fees will be reclaimed from the defendant, but there’s no guarantee of recovering other costs, such as lost time at work. You can’t usually claim the costs of hiring a solicitor, so you should plan to handle things by yourself.
Before you start legal action, send a letter to the relevant person setting out how much you’re owed, from what date, what reminders you’ve given that the payment is overdue, any interest and costs you propose to charge (as detailed above), and the time within which you now want the total amount to be paid. Allow no less than seven days and no more than 28, depending on how quickly you think they’ll realistically be able to get it sorted. Say that if this doesn’t happen you’ll ‘issue a county court claim’.
Alternatives to court
Since fundamental changes to the civil court rules in 1999, you’re now strongly encouraged to use ‘alternative dispute resolution’ (ADR) methods such as mediation or arbitration before going to court. This isn’t really relevant to cases where a client owes you a small amount of money and simply hasn’t paid up, but may be the best route if the client refuses to pay because of dissatisfaction. Mediation just means a third party talks through the issues with both sides; arbitration aims to produce a legally binding judgement. There’s no single trade body for mediators, but one large organisation is ADR Group. Unfortunately, mediators’ hourly rates are in the same three-figure bracket as solicitors (which is what many of them are), so this is not a cost-effective option for small debts.
Another possibility is to use a debt collection agency. There are plenty of the old-fashioned sort around, which you’ll avoid unless you want the kind of reputation that sends potential clients fleeing for cover, but many reputable firms now offer services ranging from basic collection – with initial contact made by phone and letter, rather than a large bloke on the doorstep – to ongoing ‘credit control’, where all your invoices are monitored for a percentage commission. Getting a letter from a debt collection agency could be enough in itself to sting many debtors into action.
* * *
Liability knocks
Have you ever infringed copyright, libelled someone, sent the wrong file to the printer, failed to complete a job by the agreed deadline, or given professional advice that turned out to be rubbish? If not, welome to the creative industries, newcomer.
We all screw up now and again. Unfortunately, the consequences can be tougher if you’re self-employed. Instead of a bollocking from the boss, you could face a claim from the client. There are also other common business risks that could apply to freelancing. If you let clients come to your home or office to brief you or pick up work, they could injure themselves while on your premises. If you sell goods of any kind – even a T-shirt with your artwork on it – you could be held liable for damage or injury resulting from defects in design or manufacture.
You can buy various types of insurance against these risks. Home office insurance, covering all your equipment against damage and theft, with public liability thrown in, should cost no more than £250 a year, but check first whether you’re already covered under your home contents policy. Professional indemnity cover can cost thousands of pounds, but fields such as graphic design are fairly low-risk and you can find affordable policies if you limit cover to the kind of five- or six-figure loss that might result from everyday cock-ups. For example, Icon Insurance (www.icon-insurance.co.uk) offers a professional indemnity package from £130.
In practice, many freelancers don’t have indemnity insurance, and that’s not necessarily irresponsible, particularly for fields like illustration where there are few everyday dangers. Unless you do something really outrageous, most clients won’t take any action against you beyond refusing to pay for unacceptable work. The best protection of all is to choose your clients wisely and talk things through so that everyone knows where they stand.
VAT’s the way to do it
VAT (value added tax) is charged on the sale of most goods and services to consumers, and is collected by traders on behalf of HMRC (formerly Customs & Excise). If your turnover is more than £58,000 per year, you have to register for VAT; if not, you can do so voluntarily. You must then charge your customers an extra 17.5%, and pass this on to HMRC.
Charging VAT costs you nothing, nor is it an issue for your customers if they’re medium to large businesses, as they’ll be VAT-registered too, so the VAT they pay on purchases is in turn refunded by HMRC. If you were dealing mainly with small (unregistered) firms or individuals, however, VAT would put you at a competitive disadvantage, because your work would effectively become 17.5% more expensive.
This is one reason not to volunteer for VAT if your turnover is under the threshold. A very good reason to register, on the other hand, is that you can claim back the VAT charged on goods and services you buy. So immediately all those annoying ‘ex VAT’ prices in Mac dealers’ adverts become the real cost: you pay the VAT-inclusive price, then claim back the 17.5% in your next VAT return. When you’re first starting out, chances are you’ll need several thousand pounds’ worth of new kit, so this could save you serious money straight away.
VAT returns are normally made four times a year, and simply offset how much VAT you’ve collected against what you’ve paid out. You can now do it all online. There’s also an optional ‘flat rate’ scheme, where you pay an average net rate for the industry you’re in, as a percentage of your income, regardless of what you’ve actually bought and sold. This simplifies the process even further, and can pay off if your purchases are small compared to your billings, as the flat rates are well below 17.5%. For example, if your turnover for the year (ex VAT) was £40,000, and you only spent £1500 (ex VAT) on VAT-rated purchases, the scheme would save you over £1560 on the 11% rate applicable to artists and journalists. And you can still reclaim VAT separately on purchases over £2000, so replacing your Mac needn’t cost you extra.
It may be tricky to categorise your industry, since design services are not well represented. HMRC’s online ‘ready reckoner’ shows the rate for each sector, so you can look for the lowest that might apply, as long as you’re confident you can justify your choice.
* * *
Further info
Practical advice on business finance
Business Link
Tax, National Insurance and VAT
HM Revenue and Customs
Guide to late payment legislation
Pay On Time
Check if a debtor is bankrupt or liquidated
The Insolvency Service
Insurance brokers
BIBA
Bank of England base rate
The Bank of England
adambanksdotcom @crazycolours @flayman @pauljchambers I'm quite surprised nobody who "does know" has offered Paul a job, the way he's handled it = great CV