Employed or self-employed - a tax guide
The purpose of this page is to provide guidance to managers within council departments as to situations which they may note whereby an individual who is to undertake work for the Council claims that they are to be treated as 'self-employed' rather than 'employed' for Income Tax and National Insurance purposes.
The guide is restricted to determining employment status for the purposes of Income Tax and National Insurance only. It does not aim to provide advice with regard to an individuals rights in relation to a contract of employment or any other matter of employment law. Enquiries on such matters should be directed to Personnel Services.
The guidance is particularly relevant to departments (e.g. Education) who use individuals for consultancy purposes and pay these directly. There is a difference where an individual employed by another organisation undertakes work for the Council but payment is directed to the organisation which employs them. In such circumstance, the individual should not be treated as 'self employed'.
It is important to understand that status is determined by fact and that an agreement between and individual and an organisation, whether verbal or written, will not determine the status of the individual for Income Tax and National Insurance purposes. The wording of the contract, which defines the legal relationship between the individual and the organisation is not the determining factor either.
It should not be assumed that a person who is registered with their tax office for Schedule D purposes will not automatically mean that they will be self employed, regardless of whether the work to be performed is similar to that for which they are registered.
The factors to be considered are related to "control", "integration", "mutual obligations", "exclusivity" "economic reality" implied by the relationship or defined in any contract between the individual and the Council. Although, traditionally, these tests were used independent of each other for the purposes of determining status, this was found to be flawed and there is a growing trend to use of a number of factors together. This is known as a "multiple test".
It is very rare to find a set of circumstances which unanimously support the status of "employed" / "self employed" and it is, therefore, necessary for the manager to make a determination based on the evidence available. Most determinations will be able to be made by reasoning on the guidance provided here. The guidance provided has been discussed with the Inland Revenue and the general content agreed.
Control
This popular test is used to determine whether an individual is subject to 'control' by another individual or organisation. Such control is deemed to be evident where :
- the individual is told when, for how long and over what time period the work is to be done
- where the work is to be done
- how the work is to be done
The test is used to establish whether or not a master-servant relationship exists between the parties. Where such a relationship does exist, it is a significant indication that the person is employed rather than self employed.
Integration
A further indication of whether a person is employed or self employed can be discerned by how integrated the individual is with the organisation.
Integration might be established by how the role being performed relates to any of the core business functions of the organisation.
It may also be determined by certain provisions within the contract and who initiates those provisions. These may include the presence of a stated rate of pay, whether hourly, annual or for another unit of time, perhaps based on Conditions of Service. An employee may also be entitled to certain benefits such a sick pay, holiday pay or pension scheme membership which a self-employed person would not.
Mutual Obligations
This is in reality a test of the obligation of an organisation to use a person on a committed or regular basis or the obligation of the individual to be available on a committed or regular basis when requested by that organisation. The test applies regardless of whether such obligations are within the written contract or have been formed over a period of time.
A situation where a working relationship has been in existence between the individual and the organisation for a long period of time or where such a relationship is expected to continue in the future indicates that the individual is employed rather than self employed.
Whether the employee receives pay for work of a similar nature which he does for another organisation(s) may also be used to help determine status. There is little scope for arguing that a person who works for only the one client, for a long period of time and where that person brings nothing but his or her labour to the agreement is self employed.
Exclusivity
This test is used to determine whether the individual with whom the Council has contracted is required to perform the work themselves or whether the contract permits the use of a substitute. If a substitute can be used to perform the work, this is an indication of self-employment.
The insertion of such a clause into a contract will not in itself establish self employment if there is a general understanding between the Council and the individual that a substitute will not be used. The permission to use a substitute as well as the actual use of such will determine self employed status.
Economic Reality
The fundamental question to be asked in this test is "Is the person who has engaged himself to perform these services performing them as a person in business on their own account ?". If the answer is "yes" then the person will likely be self employed.
Indications as to whether the person is in business can be determined by whether they have invested capital in the business (e.g. this may be established by their provision of the equipment necessary to undertake the work), whether they incur the business risk and whether they are registered for VAT / Schedule D Income Tax.
Making a Determination
As stated earlier, it is very rare to find a set of circumstances which unanimously support the status of "employed" / "self employed" and it is, therefore, necessary for managers to make a determination based on the evidence available.
In making a determination consideration should be taken to balance all of the factors detailed above.
If particular difficulty is experienced in determining the status of an individual using the guidance provided here, the Payroll Manager may be able to provide assistance. However, it is not the responsibility of the Payroll Manager to make the decision on your behalf.
In exceptional circumstances, it may be necessary to refer a particular case to the Inland Revenue in order that an Inspector may make a ruling. However, this should only be in rare cases where the guidance provided is insufficient to enable the manager to make a determination.
A determination made by a manager does not mean that the Inland Revenue cannot subsequently make enquiries of their own. However, following the guidelines presented here should mean that they will reach the same conclusion.
Determining employment status for income tax purposes
The following are questions included in the guidance provided to individuals by the Inland Revenue in their leaflet IR 56 Tax : Employed or Self-employed?
Each question has been matched to whichever of the tests detailed above to which it relates and an indication of whether an individual would be self employed or an employee is provided based on the response to the question. The questions have also been rephrased so as to approach the question from the perspective of a potential employer.
Please remember that it is the result of the multiple test that informs the decision, although the answer to individual tests may be significant.
Control Test
Can someone tell the individual what to do or when and how to do it?
Yes - indicates employee. No- indicates self employed.
Will the individual work set hours, or a given number of hours each week or month?
Yes - indicates employee. No- indicates self employed.
Will the individual work at Council premises or at a place or places decided by the Council?
Yes - indicates employee. No- indicates self employed.
Integration Test
Will the individual be paid on the basis of a rate per hour, a week, or a month?
Is the rate paid based on Conditions of Service normally applied to employees?
Is the individual entitled to overtime pay?
Yes - indicates employee. No- indicates self employed.
Mutual Obligations
Does the individual work wholly or mainly for the Council ?
Yes - indicates employee. No- indicates self employed.
Exclusivity Test
Does the individual personally have to do the work rather than hire someone else to do it for them ?
Yes - indicates employee. No- indicates self employed.
Economic Reality
Does the individual have the final say in how the business is run?
Does the individual risk their own money in the business?
Is the individual responsible for meeting any losses as well as taking the profits?
Yes - indicates employee. No- indicates self employed.
Does the individual provide the main items of equipment needed to do the work and not just the small tools which many employees provide for themselves?
Yes - indicates employee. No- indicates self employed.
Will the individual be responsible for the correction of unsatisfactory work in their own time and at their expense?
Yes - indicates employee. No- indicates self employed.