Business Risk

Individuals who risk their own money by buying assets needed for the job, bear the running costs of the business, pay for overheads, and supply large quantities of materials are almost certainly self employed.  Employees are not usually expected to risk their own capital when completing their job role.

Freelance Professionals able to demonstrate that they are in business on their own account can use this evidence to help with their IR35 defence, because taking business and financial risks are key components of being in business and point to Contractors not being ‘disguised employees’.  Thus, demonstrating financial risk helps establish a Contractor is in business on their own account.

It is to be expected that a consultancy business would be sued or forced to repair/replace an error or unsatisfactory work – without further payment; at worst, such negligence from an employee would be disciplinary proceedings.  If they were unfairly dismissed they would have the opportunity to bring a class action in the courts.

In a limited range of professions (e.g. Doctors, Architects), employees may carry their own personal professional indemnity insurance.  However, employees will usually rely on their employers and their employers’ insurers for such protection.  Employer’s insurance will usually cover an employee’s negligence, which is why they do not provide their own cover.

The possibility that your business may be sued for poor workmanship, breach of contract or worker negligence is important.  Many businesses buy business insurance to cover such eventualities.  Thus, a business with insurance cover should be able to demonstrate an element of business risk and financial loss possibility.

Another example of a financial risk is where a skilled worker incurs significant amounts of expenditure on training in order to obtain the skills needed, which is used in subsequent engagements.  This can be treated as a pointer to self employment, in the same way as investment in equipment to be used in a trade, if there is a real risk that the investment would not be recovered from income from future engagements.

Self employed workers may also be required to rectify unsatisfactory work in their no additional reward.

Financial risk could take the form of quoting a fixed price for a job, with the consequent risk of bearing the additional costs if the job overruns. The risk of making a loss is a very strong indicator of own time for

self employment and can be decisive on its own.

If you are not taking any financial risk your assignment may ‘Fail IR35′.  If any risk provision is mentioned in the contract but actually circumstances suggest that you are not taking any financial risk then, again, the assignment may ‘Fail IR35′.  Financial risk and payment are one of the main differences between employment and self employment.

The overwhelming majority of Freelance Professionals are knowledge workers; their Limited Companies do not incur the same kind of overheads as a manufacturer or other product-based business.  The corresponding items for knowledge-based consulting businesses are capital expenditure on computers and home-office equipment, possibly some tools and ongoing costs for communications, such as a business landline, broadband and mobile phone, plus ongoing training to maintain professional skills and in work-related areas like health and safety.  Marketing, such as creating a website, stationery and business cards, is also a good ongoing expense to demonstrate risk.

Having to invoice the client or Recruitment business with no guarantee of payment and having exposure to bad debts is not a condition commensurate with being employed, and is generally viewed by the Courts as evidence that Freelancers are taking risks.  A Freelance Consultant who goes down the path of debt recovery proceedings, such as sending a letter before action or using debt finance, places him or herself squarely in the realms of being in business, although there may be commercial risks with such an approach.

Sub-contractors can be used to help complete projects, or elements of projects, and may point to the Freelance Consultant bringing on board a specialist.  Freelancers can also outsource business processes, such as engaging a bookkeeping service, or a researcher.

Remember, logic and experience suggests that a typical employee would probably be exposed to very little in the way of financial risks.  They would expect to be paid regularly, on a set date, without the need for either invoice or reminder, and to receive a regular salary, from which no deductions could lawfully be made without their express consent, outside of PAYE deductions.

A mass of legislation entitles an employee to a range of benefits (thereby reducing further financial risk) including: SSP, SMP, etc; they are a preferential creditor (up to statutory limits) in the event of the employer becoming insolvent; they have rights to statutory payment in relation to unpaid salary and in lieu of notice; and if made redundant, there would be rights to a redundancy payment.

Being paid against invoice, incurring the risks of late payment, or of withholding, or of non-payment are all examples of risk.  In the event of insolvency of the Hirer, the Freelance Consultancy business would merely rank amongst the unsecured creditors, some way down from the ordinary employees.

It is also important to demonstrate that a person operating their own business, on their own account,  has the opportunity of profiting from sound management.

You should be able to satisfy as many of the above aspects as possible in order to avoid being caught within IR35 (Fail).  The contract and the actual working arrangements should include working for a fixed price, agreeing to correct defective work at your cost, providing your own insurance cover etc.

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Hall V Lorimer (1992)
In Hall v. Lorimer (1992), Mr. Lorimer took work on a first-come first-served basis.  Obviously, there were times he was unable to accept work even though he did occasionally use a substitute. In the period of just over 4 years Mr. Lorimer worked for 800 days (out of approximately 1, 050 days).  In addition, he was also registered for Value Added Tax (VAT) and had some Hirers who didn’t pay for a few months.
McMenamin v Diggles (1991)
In McMenamin v. Diggles (1991), Mr Diggles agreed to a “Full Clerking Service” at his own expense in return for 8.3% of the barrister’s right of substitutions earnings. Clearly there is a financial risk as his earnings are based on a percentage of the barristers income.

There could be a risk that the substitute could cost more than the costs the business receives. Conversely, in the Hall v. Lorimer case, when Mr. Lorimer used a substitute he made a profit, as his fee from the Hirer was more than he paid the substitute

Market Investigations
In Market Investigations Ltd v The Minister of Social Security (1968), Mrs Irving provided a series of short term assignments for the same Hirer.  She did not operate her own business and did not incur the risk of any financial loss, and was subsequently found to be an employee.
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