TXF6 UK
Syllabus B. Income Tax And Nic Liabilities B2. Income from employment

B2a. The factors - employment or self-employment

Syllabus B2a)

Recognise the factors that determine whether an engagement is treated as employment or self-employment.

Employed or self-employed?

Why do we want to know whether an individual is employed or self employed?

We want to know whether an individual is employed or self employed because there is a difference in the tax allowable deductions for the employed and the self employed. 

Additionally, there is a difference in the National Insurance Contributions payable by the employed and the self employed.

How to determine whether an engagement is treated as employment or self employment?

The main test of an employment as opposed to self-employment is the existence of a contract of service (employee) compared with a contract for services (self employed). 

If there is no contract of service, the following suggest employment:

Factors Explanation
Integral Position If the individual holds an integral position (e.g.) chairman of the organisation, they must be employed. You cannot hold key positions and be self employed.
Risk An employee will be paid his regular wage regardless of the organisation making a profit or not. He does not bear the financial risk.
Control The employer controls the manner and method of work, the employee must obey.
Legal rights The employee is entitled to benefits normally provided to employees, for example: holiday pay and sick pay. 
Equipment The employee does not provide his own equipment.
Exclusivity The employee is obliged to work personally and exclusively for the employer, and cannot hire their own helpers.

Illustration

Liam is a driver of luxury cars and started working for Super Cars Ltd on 6 April.

He works a set number of hours each week and is paid an hourly rate for the work that he does. 

When Liam works more than the set number of hours, he is paid overtime. 

Liam is under an obligation to accept the work offered by Super Cars Ltd., and the work is carried out under the control of the customer services manager. 

All the vehicles used by Liam are provided by Super Cars Ltd.

What are the factors that indicate that he should be treated as an employee?

Solution:

Risk – none. He works for a set number of hours and is paid at an hourly rate. If he works more than the set number of hours, he is paid overtime. 

Control – the customer services manager controls the manner in which the work is done. 

Equipment – all of the cars driven are provided by Super Cars Ltd. 

Exclusivity – Liam must do the work provided to him personally. 

Conclusion:

Liam will pay income tax under the employment income rules.

Liam will also pay Employee Class 1 NIC.

Super Cars Ltd will pay Employer's Class 1 NIC and Class 1 A NIC on behalf of Liam.