Opportunity to Profit

A person whose profit (or loss) depends on the capacity to reduce overheads and organise work effectively may well be self employed.  People who are paid by the job will often be in this position.  For example, a person who quotes a fixed price may well be able to complete the task ahead of schedule or at a lower cost than originally envisaged.  People who provide their own materials may be able to profit by getting a good price on the materials or by charging more for them.

A typical Freelance Professional has taken the decision to migrate from the security and benefits of employment and to make the move to contracting as a career, accepting and managing the resultant risks associated with being self employed. These risks include providing your own insurance, being aware that you may be without hirers for extended periods, and having to run and administer your own business. This could reasonably be argued that by doing this alone you have already taken advantage of a significant opportunity to profit from sound management.

Selecting the correct assignments, and anticipation of future skill requirements coupled with training as necessary to be able to meet such requirements, may also be examples of ways in which there is opportunity to profit from sound management.

You should think about the management of your business expenses. Managing expenses appropriately will have a bearing on your business’s profitability.

It is also arguable that the opportunity to structure one’s affairs by negotiating Pass IR35 contract terms where it is appropriate and correct to do so could properly regarded as opportunity to profit from sound management. Doing so would appear to be management, and it offers opportunity to profit from doing so.

Case law suggests:

  • if a worker has significant opportunity to profit from sound management of the business as a whole, the relationship is likely to be self-employment;
  • ‘opportunity to profit from sound management’ may mean either from management of the task itself, or from managing the business as a whole – the opportunity to profit from being good at what you do – and from building a reputation and a demand for your services, for which you can charge accordingly;
  • if a worker can increase his net earnings he may be self-employed, but other factors need to also be considered; this may be a pointer towards self-employment, but not necessarily conclusive in itself; and
  • it may be unlikely for the relationship to be self employment if there is no opportunity to profit from sound management.

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Market Investigations v Minister of Social Security
In Market Investigations Ltd v The Minister of Social Security (1969) – A person whose profit or loss depends on his capacity to reduce overheads and organise his work effectively may well be self employed. People who are paid by the job will often be in this position.
Hall v Lorimer
In Hall v Lorimer (1992) it was noted that Mr. Lorimer provided no equipment or tools of his own, provided no staff, no ‘workshop’ and invested no capital. Nevertheless, the Special Commissioner noted that he exploited his own marketplace, bore financial risk, accepted the risk of bad debt, and had the opportunity to profit from being good as a vision mixer. According to his reputation, there will be a demand for his services, and he could charge accordingly. The more efficient he was in running his business, the greater the prospect of profit.
What HMRC say
ESM1035: The Courts have concluded that a self employed person often has an opportunity to profit from the sound management of the task. Of course an employee’s income may also be related to his or her efforts or to other factors and so may not be regular or constant.

An employee’s income will depend on performance when paid by the piece. It could also depend on how long he or she works and that, in turn, could depend on outside factors such as the weather.

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