Written by Jess Baker @ V2 Law Blog – Image Credit: Hongkiat.com
When I first started working as a freelancer I thought that everything would naturally fall into place. I had the experience, knowledge, contacts and drive; however, I overlooked some very important legal aspects that almost cost me my business. In the beginning I knew very little about reporting taxes and workplace law; I now realize that understanding the basics is paramount.
Reporting Taxes: While it may cost extra to hire a professional to submit your tax return you can avoid a nasty penalty for doing something incorrectly yourself.
The first mistake I made was regarding my annual tax return. Rather than use an accountant I thought I’d save some money by filing and submitting my earnings myself. I had kept all of my receipts and invoices; had a detailed breakdown of my profit margins; and felt fairly confident about performing the procedure, so when I found out that I had been given an £800 penalty charge for incorrect filing, it significantly upset my operation.
The mistake I made was related to tax relief. At the time I was working from home and claimed back as much as I could – electricity, water, rent, etc. – however, I never realized that I was only allowed to claim tax relief on extras; not domestic expenses. Unconvinced of my wrong doing, I contacted Arnold Hill accountants and asked them to double check the assessment. Unfortunately it was correct; however, they helped me retain as much money as possible to cover the costs of the penalty. While it wasn’t quite sufficient, it saved my business.
Wages: Understanding the law will help you get paid when something goes wrong. Always write a formal contract and have it signed before starting a job.
When I started freelancing I had an instance when one of my employers refused to pay. When I disputed his decision I was told that I had no legal rights as they only exist when taxes are paid through PAYE. This is completely false. Under section 230 (3) of the Employment Rights Act 1996 anyone who undertakes a contract of employment retains worker’ rights (verbal contracts can also be legally binding.) This is one of the many instances where ignorance of the nuances of tax law can trip up freelancers, much like duality of purpose in trade law, stating “If an expense is incurred for more than one purpose, this … does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purpose of the trade.” (source: Mercer & Hole )
In the end I threatened to take my employer to a small claims court and he agreed to settle. I was only paid half my earnings; however, the expenses of taking legal action would have been a little too much at the time, so I agreed. Now I always draft a contract before I start any job.
Cancellation Contracts: Protect yourself from indecisive customers by including a cancellation fee clause into your contract.
When disputes arise it can be difficult to handle. I once had a client who cancelled a contract just before the work started. Due to the nature of my business I had to cancel other requests during the time we had agreed that I’d start and finish the work. The cancellation, therefore, resulted in a significant financial loss.
As part of my employment contract I clearly state that there will be a cancellation fee if the job is cancelled within a certain timeframe of the start date. In addition, I also state that I will not accept mid-contract pay cuts. I’ve had a few instances when cancellations have been sought, but after pointing out that I have a 50% cancellation fee, the work has always gone ahead without issue.
Freelancing can be a blessing if played out correctly. Sadly, my first years were quite disastrous and I just about fell for every pitfall possible. I would recommend to anyone thinking about freelancing to research workplace law; hire a solicitor to write up a general contract; and to find a suitable accountant. Mistakes will inevitably happen, that’s how we learn; however, those mistakes should never be at the expense of a career.