If you have started to work “freelance” and now raise invoices for the work you do, rather than receive a regular pay packet, the usual assumption is that you are self-employed. However, this might not be the case. Read on to help determine your employment status.

Why does it matter?

Whether you are an employee or self-employed determines how you are taxed in terms of income tax and national insurance. In particular, income tax and most national insurance is paid by a self-employed person at a much later date than in the case of an employee. Also, HM Revenue & Customs are keen to challenge someone’s self-employment status, if they believe that person should really be treated as an employee, as it is easier for tax collection from an employee (hence less likely that tax is “lost”). The national insurance yield for HMRC in respect of an employee is also higher (being payable by both employer and employee).

Factors indicating employment

Guidance from HM Revenue & Customs (HMRC) says that if the following factors apply to you, then you are probably an employee.

• Do you have to do the work yourself?
• Can someone tell you at any time what to do, where to carry out the work or when and how to do it?
• Can you work a set amount of hours?
• Can someone move you from task to task?
• Are you paid by the hour, week or month?

Of course, these factors individually are not conclusive. It would be usual for many professionals or consultants who are not employees to price their work on an hourly or daily rate, and, unless their business is big enough to employ staff, they would have to do the work themselves.

Factors indicating self-employment

The same guidance suggests that the following factors would indicate that you are self-employed.

• Can you hire someone to do the work or engage helpers at your own expense?
• Do you risk your own money?
• Do you provide your own equipment in order to do the work?
• Do you agree to do a job for a fixed price regardless how long the job may take?
• Do you decide what work to do, how, when and where to do the work?
• Do you regularly work for a number of different people?
• Do you have to correct unsatisfactory work in your own time and at your own expense?

Some factors in each list may apply to you. That’s why the issue of employment status is a tricky one, and many cases have gone to court to be decided. However, some factors carry more weight than others, and so, for example, only having one client will make a self-employment argument more difficult to justify, and almost impossibly so if you have previously been an employee of that client, and then start invoicing them as a self-employed person.

Many consultants, often in the IT industry, have historically tried to get round these rules by setting up companies through which they charge their work while still predominantly working for one client. In response to this, specific tax rules (known as IR35) were brought in to counteract this, so beware of any proposals you hear of that may appear to “disguise” employment.

As with all our information in The Business Lounge, this is not comprehensive tax advice, and may not apply to your specific circumstances; to discuss how these issues affect you, contact your accountant.