Self employed or contractor the tax rules
Whether you are self employed or a contractor you may wonder just what are the tax rules applicable to each one?
A person is self-employed if they run their business for themselves and take responsibility for its success or failure.
Self-employed workers aren’t paid through PAYE, and they don’t have the employment rights and responsibilities of employees.
Someone can be both employed and self-employed at the same time, for example if they work for an employer during the day and run their own business in the evenings.
Employment law doesn’t cover self-employed people in most cases because they are their own boss.
However, if a person is self-employed:
- they still have protection for their health and safety and, in some cases, protection against discrimination
- their rights and responsibilities are set out by the terms of the contract they have with their clients
Working out if someone is self-employed
HM Revenue and Customs (HMRC) may regard someone as self-employed for tax purposes even if they have a different status in employment law.
Employers should check if a worker is self-employed in:
- tax law – whether they’re exempt from PAYE
- employment law – whether they have an employee’s rights
Individuals and their employers may have to pay unpaid tax and penalties, or lose entitlement to benefits, if their employment status is wrong.
Checking if they’re exempt from PAYE
Someone is probably self-employed and shouldn’t be paid through PAYE if most of the following are true:
- they’re in business for themselves, are responsible for the success or failure of their business and can make a loss or a profit
- they can decide what work they do and when, where or how to do it
- they can hire someone else to do the work
- they’re responsible for fixing any unsatisfactory work in their own time
- their employer agrees a fixed price for their work – it doesn’t depend on how long the job takes to finish
- they use their own money to buy business assets, cover running costs, and provide tools and equipment for their work
- they can work for more than one client
There are special rules for businesses supplying workers, for example an employment agency.
Checking their employment rights
Someone is probably self-employed and doesn’t have the rights of an employee if they’re exempt from PAYE and most of the following are also true:
- they put in bids or give quotes to get work
- they’re not under direct supervision when working
- they submit invoices for the work they’ve done
- they’re responsible for paying their own National Insurance and tax
- they don’t get holiday or sick pay when they’re not working
- they operate under a contract (sometimes known as a ‘contract for services’ or ‘consultancy agreement’) that uses terms like ‘self-employed’, ‘consultant’ or an ‘independent contractor.’
A contractor can be:
- a worker or an employee if they work for a client and are employed by an agency
There’s a special scheme for self-employed contractors and sub-contractors working in the construction industry called the
Construction Industry Scheme (CIS).
If someone becomes self-employed
A worker must tell HMRC if they become self-employed.
But here at the Hollies Bookkeeping we can advise you on all of this and deal with HMRC on your behalf.