Am I Self-Employed? Determining Employment Status in the UK

Employment status is one of HMRCs (Her Majesty’s Revenue and Customs) hotter topics, especially at the moment, with a consultation about bringing forwards rules to tackle what they are calling “bogus self employment”. This is a bigger deal in the UK than in the majority of EU countries because of the considerably larger than average contractor workforce.

The rules governing self employment are exceedingly tricky. They consist of 4 concepts; “The Right of Control”, “Financial Risk and Reward”, “Mutuality of Obligation” and “Substitution”. Each of these concepts brings with it a set of ideas and tests, but these are a guide rather than a set of requirements. If you were to fail some of the tests it wouldn’t automatically mean you should be an employee, equally passing most of them would not guarantee that you were self employed.

To further complicate things the circumstances on site can override any contracts that are in place. Your contract may be written in such a way as to give you the “Right of control”, but if the person you report to on site can tell you how to do your job, that is what will count to HMRC.

So bogus self employment is when a contractor by deliberate intent or misunderstanding is working self employed but if following the HMRC criteria should be classed as an employee.

This essentially covers your ability to exercise control over the way you work on site and the freedom you can exercise as a contractor. When it comes to working on site, you might be told what you have to do in a broad sense; the specifications of a job and where to carry it out, but not the specifics of how to carry it out; the location of a plug socket, but not how to wire it in. Your freedom as a contractor deals more with things like your relationship with the client be it your contractual relationship or otherwise. For example if you are legitimately self-employed you wouldn’t have to ask permission to take holiday, but equally you would not expect to be paid holiday pay, statutory benefits, or even overtime.

The details of what’s required should all be set out within your original assignment, everything from location and deadline through to the price for the job. The further you stray from your assignment the greater the risk that you will be seen as employed by HMRC.

This is your financial independence from the client, if you are supplying your own tools, your own Public Liability Insurance and bear the risk of making the loss on your work, these will all support a case for self-employment. Any financial reliance on the client beyond that of the previously negotiated contract, be it for training, materials, or overtime, increases the chance that you will be judged as bogusly self-employed.

This chance of making a loss is one of the corner stones of establishing self-employment status. If you make a mistake you should make it right, and for no extra charge, that is the risk you’ve taken on by accepting the contract.

Substitution is your right as a self-employed contractor to send someone to work in your place, it also gives you the option of bringing someone with you to help complete a job. It’s important to note that you don’t have to make use of the right but it should be available to you. The contract with the client will remain with you, and you will be responsible for the work carried out, bearing the financial risk, but gives you the freedom to pursue other contracts.

Substitution used to be the giant killer of the process of determining employment, if you had the right to substitution you were seen as self-employed. This lead to overconfidence with substitution being included in contracts as a matter of course, despite the circumstances on site disagreeing. As a result people were caught out when it came time to test the contract, weakening the overall argument for substitution. It is still a very important part of proving self-employment, but it has to stand up to close inspection from HMRC whether it’s on site or in the contract.

This is perhaps the trickiest of the four to explain. It examines the relationship between a contractor and client and what they are obliged to do for one another. For a self employed contractor, there should be no obligation between them and the client. No obligation for the client to find the contractor work, no obligation of the contractor to accept any work offered or even stay on site after a job has been completed no matter how long before any deadline that might be.

If you were an employee, not only would you be obliged to carry out any work offered, your employer would be obligated to find you that work or pay you regardless. Unlike a self-employed contractor you would also not be able to refuse to work at a different location (so long as out of pocket expenses are paid), and if you wished to leave you would be required to give your employer notice.

Establishing the mutuality of obligation requirement can get quite cloudy especially for self employed contractors as sometimes proving a lack of obligation can be a challenge. A client happy with their work may offer more, and if the contractor is happy to extend the relationship he may accept, but this doesn’t mean he’s suddenly an employee, it is the point at which either party becomes obligated to the other that creates the risk of bogus self employment.

As you can see it is rarely black and white, you might be in a situation where due to site security or specialisation you cannot substitute or for whatever reason cannot use your own tools. This doesn’t immediately put you at risk, as long as your argument is strong in other areas, and you have the proof to back it up it would be difficult to judge you bogusly self employed.