Tax & Accounting News

Self employed - proving your status

26/10/2007

Confirming the Tax status of a worker has become one of the most contentious arguments that have arisen over many years in discussions with HM Revenue & Customs particularly following PAYE Compliance visits.

Self-employed status is not defined in statute and whether or not someone can be treated as self-employed is a question of fact and case law is used to work out if an individual is self-employed or employed.

One particular Tax case established three criteria of a contract of employment as follows:-

Control

Control is determined on whether the worker can be controlled as to the manner in which the service is performed. HM Revenue & Customs will look to see if the individual is subject to direction, supervision or management on how where and when the work is to be carried out.

Mutuality of Obligation

Does the individual have a continuing obligation to provide his or her services and does the engager have a similar obligation to offer work to the individual.

Personal Service

This means that when the individual is employed he is expected to give a personal service under a contract of service. Can the individual send a substitute to perform tasks in his place, if they can, then they are self-employed.

Other Criteria

HM Revenue & Customs will also look at other criteria to establish if an individual is self-employed such as:-

Integration

Is the individual part and parcel of the engagers organisation or merely peripheral to it.

Financial Risks

Is the individual providing the service through a business i.e., do they have their own company, what business structure do they have, have they invested capital into the business. Do they provide the equipment required for the job? Do they have other customers/clients? Do they have the opportunity to improve their profitability? How do they invoice. Do they have employees?

As you can see there are a number of factors that HM Revenue & Customs consider when looking at self-employed individuals. The decision as to whether an individual is self-employed is not a simple one. Ultimately, the individual in question must be carrying on a business. However, the onus is on the engager to determine the individuals correct tax status.

You therefore do need to get all the facts together before making a final decision as to whether that individual is self-employed or employed. In most cases, the decision should not be difficult, but is easy for the engager tempted by the thought of no Employers National Insurance Contributions, Holiday Pay, Sick Pay, Maternity/Paternity or Redundancy Pay to simply accept the word of the individual that he or she is self-employed.

If the engager gets it wrong the financial consequences can be significant, with HM Revenue & Customs seeking to gross up any amount paid to the individual to include income tax, employees and employers National Insurance Contributions with interest charges and penalties which can be back dated for a period of six years.

If you would like to discuss any specific circumstances concerning any self-employed status individuals or require further information, please do not hesitate to contact us.

 

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