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We make numerous references to freelancers, contractors and small businesses – after all that’s who we’re here for!
But what are the defining characters of each? What follows is a no-nonsense guide to who’s who and why. Beware: stereotypes abound.
A freelancer is a flexible worker who may or may not work via a contract. Often they don’t. They may work from the comfort of their own humble abode, or for the more profitable freelancer, from their luxury apartment in some fashionable leafy London suburb. Some don’t even get out of bed to work, they just slouch there with a laptop resting on their belly, soiled in their own marmite.
Categorising a freelancer is done by various methods. Sometimes the working environment can have an influence, other times it’s the contract (or lack of), or even the industry. For example, a writer who isn’t employed in the traditional PAYE sense will always be referred to as a a freelancer and not a contractor.
Freelancers also tend to flit about between different contracts and clients.
Contractors are often geekly bespectacled types who work on location in offices in IT orientated positions. They all know HTML. And they’re the ones always looking over their shoulder in case the HMRC should peer through the window to check if they’re getting too close to members of staff thereby falling foul of some obscure IR35 technicality.
The main difference between freelancers and contractors is that the latter usually work on long contracts whilst freelancers tend not to do that. As previously said, status is partly defined by the industry as well. Contractors don’t tend to work from home.
References to freelancers and contractors are often used interchangeably. Some people refer to the freelancing community, and when they do this, they are usually encompassing freelancers AND contractors. This also happens vice-versa.
To summarise: freelancers tend to work in the media world and contractors tend to be in the IT field. Confusingly, when an IT contractor becomes a consultant, they are sometimes referred to as ‘freelance consultants.’
Freelancers and contractors both operate their own businesses, and so they can be categorised as small businesses. Or SME’s.
In terms of defining a small business, sections 382 and 465 of the Companies Act 2006 defines a small company as one which has a turnover of not more than £6.5 million (with a balance sheet total of not more than £3.26 million) and no more than 50 employees.
Unfortunately, this definition isn’t universal, even within the confines of the UK
The term micro-business is often used informally and can be placed under the same umbrella as a small business. However, when the term is used it usually refers to companies making less than £2 million per year and employs less than 10 people.
In summary: A freelancer or contractor can also be defined as both a micro-business and a small business. Annoyingly, this definition can vary depending on who you’re talking to; for example, energy companies and banks may have their own interpretations for what constitutes a small business.
There are advantages and disadvantages to each approach, particularly when it comes to tax issues. Here's what you need to know!
While changes to dividend allowance & VAT Flat Rate Scheme have increased the tax burden for many a limited company director, the picture is still positive.