Employed or self-employed? That is the question...

With due apologies to Shakespeare for the title of this item, it seems that the rules governing whether a person is self-employed or employed can be just as vexing as Hamlet’s agony over the unfairness of life and its alternative.

A person’s employment status governs their rights and entitlements but also affects the way in which they are taxed. An individual might like the comfort of employment with the employment rights, holidays and sick pay that comes with it; but an employer might prefer the flexibility and potentially lower cost that engaging a self-employed person brings.

HMRC may, and often does, prefer the higher taxes raised on employees than the more relaxed rules for the self-employed.  Tax and National Insurance paid by employees and their employers represents a huge percentage of the overall tax take by HM Treasury.

Unless there are specific rules, for example the National Minimum Wage, the status of a person is governed by Common Law and many cases have gone through tax and employment tribunals that give us a number of “tests” to apply when determining employment status.

There is no exhaustive list of these tests and each one needs to be considered and weighed individually in each case, but some factors that need considering include:

• Control – does the employer have control over how work is carried out?
• Personal service – must the individual carry out the work or can it be delegated?
• Financial risk and opportunity to profit – can the individual make a higher profit from a job by managing it differently or is there a risk that a loss could be made?
• Mutuality of obligation – does the employer have to provide work and does the worker have to do the work given?
• Are workers entitled to holiday, sickness and maternity pay?
• Do workers have equipment provided for them?

There are many other tests that can give evidence one way or another to the status of the individual.

It is important for both the employer and worker to take proper advice before engaging a worker on a self-employed basis. HMRC will look closely at any claims of self-employment and may try to charge PAYE and National Insurance on an employer if they think they have got it wrong.

This can be ruinously expensive, particularly in industries, like construction, where self-employment is common, with tax assessments running to hundreds of thousands of pounds being issued in some cases.

If you are thinking of taking on self-employed workers, please talk to us about the above risks and how you can defend yourself against attack by HMRC.