Benefits of self employment
There are benefits to the employer. The ease of sacking and the financial benefits of no employer’s national insurance, no pension contributions, no sickness and holiday pay etc.
The main advantage to the worker is the reduction in national insurance and the ability to claim expenses such as, wages to family members, use of home, travel costs etc.
This is from the different wording of the act. Allowable expenses for the self employed need to be “wholly and exclusively for the purposes of earning the profits of the trade”.
For employees they must be “incurred wholly, exclusively and necessarily in the performance of the duties of the employment”.
There is also the cash flow advantage. The self-employed do not suffer deduction of tax at source. As with all planning it is necessary to commit all the figures to paper to completely understand the financial implications and result.
The statutory position
Neither employee nor employer is defined in the Taxes Acts.
Common law differentiates on the basis that an employee has a contract of employment whereas a self employed person works to a contract for service.
The difference can be explained by the example of your house being painted. Who does the work? Is it the person who quoted or someone on his behalf?
The person who quoted is clearly self-employed but is his worker an employee? Is he under the control of the man who quoted or has he sub contracted his services?
To resolve this question you must review many aspects of how that person carries out his duties. You cannot just run through the check list on the HMR&C web site but you must paint a picture from the information gathered from that review. Then review the picture and make a decision.
Opportunity to profit
An employee is paid a set sum under his contract whereas a self-employed person can profit from his actions. He may also lose money; an employee cannot.
Employees are remunerated for the hours they work whereas a self-employed person is usually paid for the job or task he has performed so the profit is in his own hands. He can adjust overheads and time; also he can take on help to complete the contract.
Employees cannot and cannot influence their return and they take no risk.
Mutuality of obligations
The length of a contract is not conclusive one way or the other. Employees often enter short term employment contracts.
What is important is that the self-employed can decline work and in effect select the work they want to do. Employees would be sacked if they declined work. Make sure the contract is per job or for a fixed term.
This assumed importance in the case (Sp C 599 Parade Park Hotel) which is useful in determining the meaning of mutual obligations.
It means that so long as the contractor is not obliged to offer a new contract and as long as you can decline work, then mutuality of obligation does not exist.
This was confirmed in the case of Bridges and others v Industrial Rubber plc where the contractual absence of a promise to provide work and the counter promise to do it was inconsistent with a contract of employment regardless of the other conditions of the working relationship.
Make it clear in the contract that the sub contractor is responsible for his own tax and national insurance and receives no benefits e g. no sick pay; no holiday pay and no pension contributions are paid on his behalf. It would be wise for the sub-contractor to register for VAT.
A self-employed worker usually provides the tools necessary to do the job.
Employees such as tradesmen usually supply the necessary hand tools. Larger items of equipment would be provided by the employer, the self-employed sub-contractor would provide them himself even if leased.
For any engager the standard of work performed is important. An employer will require the employee to correct any unsatisfactory work but it is done in the employer’s time.
A self-employed person must perform the contract to an acceptable standard according to the terms of the contract. Any unsatisfactory work is put right in his own time and at his own expense.
It is important as to how workers are viewed by the neutral. An explanation of this item is outlined by the following example taken from the HMR&C web site.
“Someone taken on to manage a client’s staff will normally be seen as an integral part of the client’s organisation and this may be seen as a strong indicator of employment.”
Most people explain that if you work for only one engager or contractor you cannot be self-employed.
I agree that the more firms worked for the more likely a person is to be self-employed. Only one engager is not conclusive of employment.
You could have three concurrent employments. A good example of one engager not preventing self-employment would be lorry drivers. If you look at the driver’s door of a lorry you will see an indication of what I mean.
It is clear that if you supply the major equipment you are more likely to be self-employed.
Nothing can be deduced from part time work as both an employee and a self-employed person can work part time. A person can work for more than one engager.
He can have more than one employment; more than one engager but within the self-employed status. An employee under a contract of employment can also be self-employed at the same time.
If a subcontractor does not want to meet the cost of materials get the contractor to allow the sub-contractor to use his suppliers’ accounts and enjoy the same discounts. He will, of course, meet the cost from the recharge in the contract price.
If a contract requires a worker to provide personal services and requires the person who engages that person to remunerate him for those services that is likely to be a contract of service and thus an “employment” contract.
Such a contract will go on to specify all the other conditions and requirements of the engager i.e. working hours, holidays, sickness, discipline, grievances etc. So avoid reference to specific days or hours to be worked.
A clause that specifies that a worker can send a substitute in his place or engage other workers to help him fulfill his obligations under the contract is very important in considering the overall balance of the factors and must be in every self-employed contract.
This is one of the strongest single indicia of self-employment. Dr Avery Jones in the case Talentcore Ltd v Commissioners for HMR&C found that the substitution issue was more important than the control factor.
Again I must stress that the actions of the parties must mirror the contract so it would be wise to ensure that substitution takes place during the life of the contract or that help is engaged. The point is that under a contract of employment it is the worker that is employed and it is his labour that is pledged. The labour of someone else must mean a contract for rather than of service.
HMR&C acknowledges that it is the right of substitution that is important. The fact that the substitution has not occurred during a contract is not necessarily relevant. However, a contractual right will be ignored if in reality the worker must undertake the work personally. Dragonfly Consultancy Limited v HMRC (2008)
Most employees are paid by the hour, week, month or are on an annual salary.
The self-employed are usually paid by the job.
I find no difficulty in turning a day rate to payment per job. Take a bricklayer; he knows from the plans how long the job will take. Let us say four days and assume his rate two hundred pounds per day. He simply quotes eight hundred pounds for the contract.
Like all the indicia no one item is crucial. It is the balance between them all. HMR&C place considerable reliance on the method of payment but as I have said it is only one item.
Make sure, for example, that he hires the necessary scaffolding!!
There is virtually no financial risk to an employee. The self-employed risk their money. HMR&C indicate that “The risk of making a loss is a very strong indicator of self-employment and can be decisive on its own”.
Make sure you take out all the necessary insurances to include public liability and professional indemnity.
If you undertake work at home make sure with your broker that your home insurance covers any risk.
An employee is usually subject to a large degree of control although not always exercised in practice. He is also told how to do the job, although an expert such as a brain surgeon would be free of that control.
Also an employee’s hours of work, the place where he carries out the contracted work and other practical items are controlled by the employer.
In the case of Market Investigations Ltd. v The Minister of Social Security the Judge said “The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor”
The self employed are free of this control. See J and C Littlewood (T/a J L Window and Door Services) and Anor v R & C Commrs. January 2009 for the importance of this subject.