To be employed or not to be employed...
... that is the question. Jacqui Brennan sheds some light on the thorny topic of a worker's employment status in the eyes of HMRC
So what is the difference between employment and self-employment? Surely the answer can be easily reached by following a few simple guidelines and ticking the correct boxes on HM Revenue & Customs' (HMRC) status indicator? If only it was that simple.
There is a statement that is essential when looking at whether someone is employed or self-employed. This is shown on HMRC's website as follows: 'A worker's employment status, that is whether they are employed or self-employed, is not a matter of choice. Whether someone is employed or self-employed depends upon the
terms and conditions of the relevant engagement."
You will notice that the word 'relevant' has been highlighted above. It is possible for someone to have self-employment but still be an employee for specific engagements, or vice versa. For example, it is possible for someone to be employed as a telephone engineer while undertaking self-employment fitting burglar alarms. Similarly, self-employed accountants may be employed - for example, as a company director - under one or more specific contracts.
Terms of contract
Take the example of the telephone engineer. If the balance shifts, the fact that three days are spent fitting burglar alarms for home-owners does not mean that the two days spent working as a telephone engineer will now fall within their self-employment. It is the terms of each contract that will be important.
Simply relying on the written terms is not sufficient: actions taken must reflect the words of the contract. If someone has, and follows, a contract for services, they have agreed to perform certain services only. They will be self-employed and independent. If someone has a contract of service, they will be an employee.
The legislation does not define employment or self-employment, so this thorny issue has to be tackled by referring to the vast amount of case law that has built up over the years. While the facts of each case have differed, there are underlying similarities.
Another way of viewing the differences is that a contract of service (employee) provides for a master/servant relationship, with the worker taking direction from, and being under the control of, a third party who they are 'serving'. On the other hand, a contract for services (self-employed) usually relates to the completion of a specific task, or tasks, without the master/servant relationship. These terms 'master' and 'servant' may seem old-fashioned, but they do go to the heart of the employed/self-employed debate and the terms of that relationship are important.
HMRC has produced substantial guidance over the years. One example is IR56 - Employed or Self-Employed?, which can be found at www.hmrc.gov.uk/pdfs/ir56.htm. The booklet was produced prior to the merger of the Inland Revenue and HM Customs, but is still shown as a current document. The following statement, set out on page 2 of the booklet, looks at the distinction between employed and self-employed in another way: 'Broadly, you are self-employed if you are in business on your own account and bear the responsibility for the success or failure of that business, and employed if you personally work under the control of someone and do not run the risks of having a business yourself.'
Taxation and employment rights
The many issues surrounding employment status are wide and varied. Taxation and employment rights are just two examples.
An employee has tax deducted under Pay As You Earn (PAYE), and Class 1 National Insurance (NI) contributions are collected at the same time. However, employment legislation gives the employee certain rights, such as Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), paternity rights, paid holidays and employment protection.
The self-employed have to self-assess their income and pay their tax and Class 4 NI contributions on two set dates each year. Class 2 NI contributions will also normally be due. The delay in payment of the tax may be a bonus, but cash flow issues around payment dates can be a problem for some. NI contributions paid by the self-employed do not provide the same right to Social Security entitlement as those paid by an employee and their employer. Therefore, many government-provided benefits will be based on means testing rather than by right.
Jacqui Brennan is an AAT Council member
Accounting Technician - February 2007 - page 33
