Employment Status Assessment

In the UK each worker will fall into one of two categories – you are either Employed or Self Employed. This section of the micro site explains the differences, and links these differences to IR35.s.

An Employed Person

An employed person is someone who works for another. The relationship is usually evidenced with an employment contract. The employee usually works on a fixed routine, gets paid on a fixed cycle, and is obliged to carry out the reasonable requests of the employer.An employed person doesn’t take business risk – this being something that the employer carries.  An employed person usually has to undertake the job role personally; they cannot usually decide to take a day off, sending a stranger to work for them. An employed person often expects to remain with their employer for several years, is trained and developed by the employer, and has a series of performance review meetings.

A Self-Employed Person

On the other hand, a self employed person works on a more relaxed routine. They usually get paid when they complete a particular, specified task. If they don’t deliver the task, or turn up to work, they don’t get paid. The Hirer cannot usually direct them to do something that is unrelated to the task in hand.The self employed person can often send another to work on the task, because the Hirer is interested in completion of the task, not who does the work.

The self employed worker often carries business risk. This includes supplying equipment and tools, not getting paid if the Hirer defaults, and having to pay for an Accountant and insurance.

Regrettably, the question of employment status (i.e. which category you fall into) isn’t a matter of law; it is not written down in any statute of Parliament. It is derived from a series of decisions in the Courts. This means that it is not possible to arrive at the answer by ticking a series of boxes or by adding up a score. Although not perfect this does, of course, mean that there is some flexibility and interpretation around status.

To make matters more complicated, the Courts, Lawyers and HMRC use a separate terminology compared to the rest of us. Therefore throughout this micro site, particularly when we have quoted from case law or HMRC, you will see the terms ‘Contract for Service’ and ‘Contract of Service’. Whenever you see these terms remember:

Contract of Service means the same as Employed or being an Employee;

Contract for Services means the same as Self Employed or ‘being in business on your own account’.

Incidentally, a Sole Trader is someone who works for themselves, often by way of a trade or profession. Sole Traders are self employed workers.

The Link with IR35
As you consider the professional Freelance world it is quickly obvious that you do not have the benefit of a benevolent employer. You accept that you take an assignment in the knowledge that at the end of the fixed term the assignment ends and you will have to look for new work elsewhere.

However, and for reasons explained in ‘Where IR35 Came From‘, government and HMRC do not simply accept the fact that you are engaged on a fixed-term assignment as evidence that you are self employed. They look at the nature of the services that you are providing to the hirer and assess it against the status ‘tests’ that have been established by the courts. If these tests, when applied to your individual assignment, indicate that you are akin to an employee, that assignment is deemed to Fail IR35. On the other hand, if your assignment indicates that you have a self-employed relationship with the Hirer, you are deemed to Pass IR35.

Pass IR35 means Self Employed, or outside of IR35;

Fail IR35 means Employed, or inside IR35.

To fully understand the status of your assignment you need to consider the working relationship with the Hirer against the tests established by the Courts. These are thoroughly examined in the Assessing IR35 Status section of this site.

Once you have decided on your relationship with your Hirer you must ensure that the ‘Assignment Contract’ that you are signing/have signed truly and accurately reflects this position.

For further background reading please visit hmrc.gov.uk/ir35

Once you have decided whether you Pass or Fail IR35, you should communicate with your Accountant so that they can calculate your taxes correctly. Remember, each contract should be individually assessed on its merits.

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