The working world has changed drastically over the last few years, with the days of job-for-life, 9-5 factory workers long gone. You are more likely to find freelancers working from coffee shops, part-time delivery drivers cycling along the road, or contractors who operate as their own limited company.
The world of work is so diverse that it’s even more important to make sure you get tax right for your particular solution. In this post, we are tackling the (sometimes thorny) subject of self-employment and what it means if you are also employed. We’ll cover:
- Tax and employment law are different things
- What are HMRC worried about?
- What is self-employment?
- Can you be self-employed and work for only one company?
- A word about directors
- Can you be both employed and self-employed by the same client?
Tax and employment law are different things
This is an important distinction, but one that is often not made clear. Surprisingly a person can be classed as employed (or a “worker”) for employment purposes but still be self-employed for taxation, such as in the famous case of Pimlico Plumbers. So, it is important to state that we are talking here about tax law here.
We could write a book about the differences and indeed, the area is so complex that there have been numerous cases which have, rather confusingly, found for both sides of the debate over the years.
The overall message has to be that you need to be really careful, and not take a view based on one case. Look at all of the circumstances of your situation even-handedly and of course, if you are unsure, take advice!
Why is my employment status so important?
Employers pay National Insurance Contributions (NICs) and pension contributions on the wages and salaries that they pay to their employees. The employees also pay tax and NI on what they earn.
If they use the services of a self-employed person, the business is able to avoid making these employer’s contributions by contracting with someone, rather than employing them.
Consequently, many employers took advantage of this distinction over the years. It’s why HRMC is wise to the idea, and introduced rules about disguised employment in order to tackle potential tax avoidance.
Essentially this follows the duck rule; if it walks like a duck and quacks like a duck, then it is probably a duck. If someone looks and acts like they are employed, then their employer should be paying national insurance!
What is self-employment?
Self-employment is where someone is working on their own behalf. They could have hundreds of customers or only a few but they will be working in their own business.
Typical features of self-employment from a tax point of view include:
- The person has control of how they do their work
- They insure themselves
- They advertise or seek work rather than being presented with it
- They provide their own equipment
- They have to put things right at their own expense if they go wrong
- They have no obligation to accept work
- Their client has no obligation to offer them work
A self-employed person who works as a sole trader will submit a Self Assessment tax return each year and pay their own tax and NIC, rather than having an employer deduct them from their wages. They’re also responsible for their own pension and sick pay.
Can you be self-employed but only work for a single client?
Yes, you can, but you do need to be careful that what you’re doing isn’t actually ‘disguised employment’.
HMRC accepts that people might well be self-employed but work for one company at a time. For instance, if the person had just started out in self-employment and was actively seeking more clients, without the knowledge of their employer.
It is also possible that people may work for only one client at a time, and then move on to another job. For example, someone doing a specific role in a project, a camera operator working on a film, or a social worker doing an assessment.
The question is whether, over a reasonable period of time, they either have more than one client or they are looking to get more. So, although a camera operator may work solely on one film at a time, if you look at what they do over the course of a year or two, they may work on several.
What does this mean for company directors?
Directors fall into a category all of their own called officeholders. It’s often the case that directors think they should be paid as self-employed people, especially where they hold more than one directorship (a portfolio director) or where they are acting in a non-executive capacity.
However, HMRC mandates very clearly that all officeholders should be paid through PAYE and aren’t actually self-employed. In this respect, directors are basically an employee of the company, even if they own the company.
Can you be both employed and self-employed by the same client?
It is possible to both be employed and self-employed by the same company, but you have to be very careful. If you look like you are employed, then you probably are!
As an example, imagine a person who works as a graphic designer part-time. The company asks them to do more work on their non-working days, and to bill them as a self-employed person.
It’s difficult to see how this couldn’t be disguised employment. They’re doing exactly the same work, for the same client, at their instruction and using their equipment. In this case HMRC would say that they should be paid through PAYE.
So how could you both work and not work for a company?
Now let’s imagine someone who works as a delivery driver for a business and also has her own DJ business at nights and weekends. She’s very popular and often works 3 or four nights a week in local clubs and at weddings, meaning she has a wide range of different clients, and she also advertises for work.
The company pay her to DJ at the annual Christmas party using her own equipment. In this case, we can see that she meets the tests of self-employment and the work she is doing is highly unlikely to be covered in her employment contract. In other words, it is outside the scope of the PAYE employment.
She’d have an arguable case that the two were completely different and could be paid as a self-employed person.
In truth, the majority of cases won’t be so clear cut as these, so you need to be careful. If you are unsure, then it is always sensible to put it through PAYE.
Summary: self-employment Vs PAYE – a case of blurred lines
The main problem when we are talking about self-employment is that many of the rules aren’t totally clear, and it’s a difficult task to make a single rule to fit every situation. Add into the mix where people are employed at the same time, then you have a recipe for disaster.
Frankly, in the majority of cases, you’ll know whether you should be paid PAYE or self-employed. Remember that HMRC see cases like this every day, so we can promise that anything you think of, HMRC has already seen!
Deliberate deception allows HMRC to double the penalties it levies as well as charging you for the tax and NICs not paid, as well as interest on top, so it really isn’t worth it.
Where your case is not clear cut then you do need to take advice and make sure you are playing fair. Even if you get it wrong, HMRC will often take the view that if you took advice, you did everything you reasonably could and so are less likely to hand out penalties.
Find more freelance support and guidance in our info hub!