Was reading your conversation and I have a story of a similar position but the opposite way round. I had a web design company of my own a few years ago and employed a graphic designer but he was self employed and did all his own tax and we werent sure how to go about this as we wanted to employ him, we investigated what the legal thing to do was with tax etc and it worked out that we couldnt it was either one way or the other, so in the beginning he continued as self employed and he billed us for his hours. But as you say if you havent signed anything or no-one actually said to you cant do any freelance work then you are not legally in the wrong.
