The status of your employment goes a long way in dictating your tax obligations and the relevant expenses and losses that are legally deductible.
Your employment status is important because it dictates your tax obligations and what losses and expenses you can deduct. There have been a few cases where companies and contractors have fallen foul of HMRC’s Status Reviews because the way they work together is deemed that of an employer/employee relationship.
Why does it matter?
As an employee, you should be receiving all the benefits, such as holiday pay, pension contributions and sick pay. It also means that your employer should be paying NI contributions. If you are self-employed, you can deduct your expenses from earnings to reduce your tax bill and you can also take advantage of a number of additional benefits. If you are working as a contractor but in reality you should be an employee, HMRC wants to make sure that you are paying appropriate levels of tax. While in some cases that may disadvantage you, you would instead benefit from employee rights and additions as mentioned above.
You could also be subject to IR35 tax legislation if you are considered a ‘disguised employee’ by HMRC. This is the case if you are providing a service to a company through an intermediary, like a limited company, but without the intermediary you would be an employee. This should not impact genuine contractors, or those working through a recruitment agency, but can have a significant impact on income tax and national insurance contributions if it applies to you.
How to work out if you are an employee or self-employed
Firstly, your contract should state if you are employed or contracted.
- An employee will have an ‘employment contract’ which is a contract of services.
- A self-employed person is a business in their own right with a contract for services with you.
However, a contract is not always enough to satisfy HMRC, if the practical relationship or arrangement is contra to a typical employer and employee/self-employed situation. Here are some of the things to look out for.
Rewards and risks
As well as the benefits employees enjoy, such as parental leave and others mentioned above, they would also potentially receive bonuses. Someone who is self-employed, on the other hand would spend their own money on equipment and tools for their business and would earn profit from managing their income and spend. If you own your own business equipment, such as a creative designer purchasing their own software, you are likely self-employed. Someone self-employed would also likely have to fix any issues arising from work at their own cost, whereas an employee would do that at a cost to the business.
Scope of services provided
A contractor or self-employed person has an agreed scope of work with a company, and would not carry out any additional duties. An employer would legitimately be able to ask an employee to complete tasks outside of their job description (within reason), such as supporting another employee, or taking the post. If the work you do for a company creeps outside of your agreed scope of services, you are being treated like an employee and HMRC may deem this to be the case.
Treated like an employee
If you have been working with a company on an on-going basis for a while, it is likely you will begin to be treated as part of the team. You need to be careful as a contractor that you are not being treated the same as employees. This could include being given business cards, having an exclusive working relationship or joining in on away days where business decisions are made.
If you are self-employed, you could sub-contract your work to someone else, and upscale or downsize your team as required to get a job done. An employee would not be able to do this.
So, which one are you?
As you can see, just taking one scenario is not enough to determine if you are self-employed or an employee. HMRC would compare your situation to all these criteria, and more.
If there might be a case for you being an employee and self-employed, contact us and we can discuss with you your situation, and how to avoid a tax trap.