Employment status is a complex issue, which is why there have been so many high-profile court cases about it recently, with the likes of Deliveroo, Uber and the Post Office all being involved in disputes about the employment status of their workers.
Employment status for tax purposes
It’s possible to be self-employed in terms of employment law, and still be “employed for tax purposes”. Self -employment means your pay is treated differently for tax purposes and if you get it wrong it can cause serious problems for you and your end clients.
If you class as being employed for tax purposes you have to pay broadly the same tax as an employee would, and your end client or agency has to pay employer’s national insurance. If you incorrectly class yourself as self-employed, your end-client or agency will be liable for any unpaid tax or NICs. This is why some clients or agencies will ask you to work through an umbrella company or your own limited company.
In addition to paying PAYE tax and NICs and increasing your clients’ costs, being employed for tax purposes severely limits the expenses you can claim. For example, your journey to work is likely to be classed as “normal commuting” which will mean you can’t claim for mileage, parking, bus or train fares or subsistence when attending your client’s premises.
How to tell if you’re genuinely self-employed
There is no simple definition of employment or self-employment, so establishing and protecting your employment status can be complex and involved. However, if you’re aware of the rules you can choose contracts that allow you to remain clearly self-employed. If you have concerns about a new contract, it’s worth talking to the client about it, as it’s in their interests to help you avoid being classed as a “disguised employee”.
The following are indications that you’re genuinely self-employed:
You’re in business for yourself and you are responsible for the success or failure of your business
The client does not have the right to supervision, direction or control (SDC)
You could hire someone else to do the work in your place
You use your own money to buy equipment, cover running costs and provide tools and equipment for your work.
The definitions of Supervision, Direction and Control
If any one of the below applies, you are caught by SDC and HMRC will consider you to be employed for tax purposes
This applies when someone at the end client oversees you to ensure the work is done correctly and to the required standard. It can also apply if someone assists you to develop your skills and knowledge.
This applies when the client provides guidance, instructions or advice on how the work should be done. Direction will often include co-ordinating how the work is done as it is being undertaken.
This is where the client dictates what work you do and how you should do it. This includes the power to move you from one task to another depending on the client’s priorities.
Avoid “drifting” into disguised employment
Unless you pay attention to your employment status and actively protect it, it’s easy to find yourself being drawn in to your client’s organisation, particularly if you work with them for a long time. Taking these steps can help to ensure that you don’t accidentally move into disguised employment over time.
Make sure you’re identified on staff lists and phone lists as a contractor.
If ID badges are worn, yours should say you’re a visitor.
Use your own email address. If you have to use a client email address, make sure your signature highlights that you’re an independent contractor
Use your own business cards, not your end client’s
If you use a staff canteen, you shouldn’t get an employee discount. The same applies to other office perks, like a gym, carpark or Christmas party
If you can’t work on a project as planned, for example due to an IT outage, leave your client’s site rather than accepting alternative work.
What happens if you get it wrong?
HMRC can and will investigate your employment status if they believe it’s incorrect and they will recover any PAYE tax and National Insurance that has not been paid, either from you or your client, and this could include interest and penalties.