Am I an employee or a self-employed contractor is a daunting question that many of you may have thought about at some point in your work life. And after searching the internet and reading various articles, you may still be as confused as you were at the beginning of your research, if not more.
The area of law that sounds so simple is frustratingly confusing because there is no statutory test to determine an individual’s working status. Yes, there is no single straightforward test to determine whether an individual is an employee or self-employed.
Therefore, an even more worrying question arises, “How do I know my status then?”. The answer to this question is somewhat relieving. And the answer is that the current approach to determining an individual’s working status is provided in case laws.
Why is the classification Important?
Before going any further, it is essential to understand why differentiation is necessary. Why can’t you simply choose your own working status? That’s because an incorrect classification means that the amount of tax and NICs paid is incorrect, and the timing of the payment of tax and NICs is also incorrect.
It is also unfair that two individuals engaged by separate businesses in a similar position or role perform the same tasks and receive the same pay, but their tax and NICs are different because of the incorrect classification.
As there is no single and straightforward test to determine the individual’s status, HMRC advice is to consider all the factors in an individual’s case. Some of the factors are covered by the case law, and others are economic reality tests that the courts adopt when determining someone’s working status.
Case law has dictated that four factors must present before an individual can be classed as an employee. These are;
- Mutuality of Obligation.
- Wage paid to the worker.
- Personal Service.
Once the above four factors are present, the courts adopt an economic reality test. The economic reality test takes multiple factors into account. Some of the factors are;
- Degree of integration.
- Who owns the equipment.
- Basis of payment.
- Financial risk.
- Opportunity to profit.
- Business organisaiton.
- The number and length of engagements.
- Name of the contract and position of parties.
The above list is not exhaustive but includes the most important criteria.
Importance of Contract
There are two types of contracts that make the basis for an individual’s working status. “Contract of Service” is where an individual is an employee, and “Contract for service” is where an individual is self-employed.
Although the contract is one of the most critical parts of the working engagement, you must not rely on the contract solely. HMRC looks at the practical nature of the working engagement as a whole and not only the contract for the IR35 Review.
Common Sense Approach
After going through all the complexities of the case laws and advising my clients on their working status, I always ask them one simple question. “Be honest to yourself and tell me, are you an employee or self-employed.”? In most cases, the answer is clear, and I have always been able to relate the answer to the practical nature of the engagement and the case laws.
This area of law and tax is very complex, and rigorous knowledge and expertise are required to be able to determine the most complex working arrangements. Although HMRC has provided a tool that can be used to determine your working status, sometimes the result is inconclusive. In which case, you can ask your local HMRC status inspector for an opinion.
At Spherical Accountants, we have helped many individuals with their status determination. If you need assistance with your status determination, please feel free to contact us, and we will be happy to produce a written opinion for you.
Zia Tahir, the author of this article, has years of experience and in-depth knowledge of complex income tax and capital gains tax. To book a free and non-obligatory with Zia Tahir, please call us on 020 7859 4047 or fill in the contact form below.