Employed or Self-Employed and IR35
1. Why does it matter whether someone is self-employed rather than employed?
The difference between an individual who is an employee and one who is self-employed is of great significance legally and in relation to tax. (For convenience, this note refers to an individual as a “worker”, whether they are employed or self-employed.)
A worker’s status in employment law as an employee is important in relation to determining their rights and their employer’s responsibilities. If a worker has the legal status of an employee rather than a self-employed person, it will have consequences for them and their employer because of the different level of statutory and common law protection afforded to employment compared to self-employment. A list of rights of employees is set out in the information page: Rights of a Worker Arising from the Status of Being an Employee. You need to be aware that even if the arrangements that you make with workers amount in law to self-employment rather than employment, then, depending on the particular situation, self-employed workers (not just employees) may be covered by equality legislation. Note also that you may have responsibility for the actions of a self-employed worker who works for you, depending on the particular situation.
As to tax, deciding whether tax is paid under Schedule E or D and whether national insurance contributions (NICs) are paid as a class 1 or class 2 contributor, depends on whether the worker is self-employed or an employee. If the worker is self-employed – unlike where they are an employee – the client need not deduct income tax and NICs at source through Pay as You Earn (PAYE). HM Revenue & Customs (HMRC) is therefore highly suspicious of any artificial self-employment relationship, particularly where the self-employed person has no other 'clients'. See also the information page on: Working Through an Intermediary company.
The key purpose of these information pages is to provide some general guidance on whether a worker in any given case is likely to be regarded in law as employed or self-employed or, in relation to IR35, as if employed by the client of an intermediary company used by the worker. In the event of a dispute about that issue, bodies such as Employment Tribunals and HMRC will take into account a range of factors in deciding whether a worker is to be regarded as an employee or self-employed.
Before we consider the subject in any further detail, please note that a worker’s status (as either employee or self-employed) in tax law may be different from the worker’s status in employment law.
2. Are they employed or self-employed?
When workers carry out work for others, they may be engaged as employees or instead as self-employed.
An employee is an individual worker who has entered into, or works under, a contract of employment.
A self-employed person is an independent contractor who usually works under a contract for services. Self-employment has advantages for both you as the employer and also in many cases for the self-employed worker.
Workers might intend or aim to work on a self-employed basis, as might the person/organisation engaging them but despite their aims, intentions and their arrangements, the position between them and their clients might not amount in law to self-employment. This may be so even where they and their client describe or label the arrangement as self-employment.
3. How to determine whether someone is employed or self-employed
Individuals working on a self-employed basis are often described as “freelancers”, “sole traders”, “self-employed”, or as “individual contractors” but, as mentioned in paragraph 2 above, use of these or other “labels” in any case does not determine whether a worker is self-employed rather than employed. The two parties cannot by using particular terminology just decide the nature of the employment relationship between themselves: in law, the reality of the relationship has to be taken into consideration and the correct terminology used to match the reality.
Usually it will be easy to decide whether someone is an employee or self-employed. However, there will be many cases where it will not be so easy to decide. Where two workers are engaged to carry out similar work for the same person / organisation, it may be that one is self-employed and the other is an employee because they have been taken on under contracts with different terms and conditions. The essential question to decide is whether, in carrying out work for a person / organisation, the worker is carrying on a business.
Before looking at what features of a relationship indicate that someone is carrying on a business (i.e. that there is a contract for services under which the worker is engaged and works on a self-employed basis), it may be helpful to quote some authoritative legal comments on the subject. In the High Court Mummery J. made the following comments which were quoted with approval by Nolan J in the Court of Appeal:
'In order to decide whether a person carries on business on his own account it is necessary to consider many different aspects of that person’s work activity. This is not a mechanical exercise of running through items on a check list to see whether they are present in, or absent from, a given situation. The object of the exercise is to paint a picture from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and by making an informed, considered, qualitative appreciation of the whole. It is a matter of evaluation of the overall effect, which is not necessarily the same as the sum total of the individual details. Not all details are of equal weight or importance in any given situation. The details may also vary in importance from one situation to another. The process involves painting a picture in each individual case.'
HMRC provides a certain amount of guidance on its website as to whether in any particular case it would regard a worker as employed or self-employed but ultimately in any given case it would be for a court or tribunal to decide. HMRC decisions as to whether or not someone is self-employed are often based on a “balancing exercise” in which it gives weightings to various factors. However, neither the HMRC guidance nor case law are sufficiently precise to enable anyone to predict how in any particular case the “balancing exercise” would be carried out or what HMRC’s conclusion would be about that particular case. For that reason we recommend that you take professional employment law, tax, and NIC advice in relation to your particular circumstances.