There are big differences between the tax treatment of the employed and the self-employed. PAYE applies to the former and not the latter, which means that payments to an employee carry employer’s national insurance contributions (NICs). Payments to an employee also have income tax and employee’s NICs deducted at source and the regime by which employees can obtain tax relief for expenditure incurred in earning their income is far stricter than that which applies to the self-employed. It is not surprising, therefore, that businesses and HM Revenue and Customs (HMRC) often take differing views as to whether a person is employed or self-employed.
The penalties for getting such judgments wrong can be severe. In general, if the following questions can be answered ‘yes’, the person is likely to be self-employed:
- Is the payment made for doing the job rather than for the hours worked?
- Does the person doing the job decide how it is to be done, who will do it and when it is to be done?
- Does the person doing the job supply their own tools?
- Does the person doing the job do similar work for other customers?
- Does the person doing the job carry commercial risk (i.e. if the job is not done properly, will they have to rectify it for no further payment)?
In a bid to reduce the number of disputes regarding employment status, HMRC have launched a web page to help guide decisions on whether a person is employed or self-employed. The guidance involves answering a number of ‘yes or no’ questions and these are the same questions that PAYE inspectors will use when reviewing payments made. The website is at