Self-employed workers & tax

In order to be genuinely 'self-employed' and fall outside Schedule 'E' status, workers must be able to meet the necessary tests applied by HMRC.  These are those detailed in the now archived IR56 guidance.  IR56 countered tax avoidance by individuals and organisations seeking to reduce National Insurance and Tax liabilities by using bogus self-employed workers (Schedule 'D').

IR35 was introduced to counter tax avoidance by the use of intermediaries, such as service companies or partnerships, in circumstances where an individual worker would otherwise be an employee of the client or the income would be income from an office held by the worker.  

With the introduction of the National Minimum Wage and the Working Time Regulations, the engagement of 'self-employed' workers, particularly salespeople has become an attractive idea for certain businesses. The tests of whether an individual is genuinely self-employed (Schedule 'D') or employed (Schedule 'E') are given below:

The person is probably self-employed if he or she:

  • Has the final say in how his or her business is run;
  • Risks his or her own money in the business;
  • Is responsible for meeting losses as well as taking the profits;
  • Provides the main items of equipment needed to do his or her job (not just the small tools many employees provide for themselves);
  • Is free to hire other people on his or her own terms to do the work he or she has taken on and pays them from his or her personal funds (substitution);
  • Has to correct unsatisfactory work in his or her own time and at his or her expense.

The person is probably employed and should be paid via PAYE if:

  • He or she has to do the work and does not have the freedom to hire someone else to do it;
  • He or she can be instructed as to what to do and when to do it;
  • He or she is paid by the hour, by the week or monthly;
  • He or she can claim overtime;
  • He or she is required to work set hours, or a given number of hours a week or month;
  • He or she works on the premises of the person he or she works for, or at a place or places the person he or she works for decides.

It is possible to construct a set of circumstances to justify an argument that an individual is self-employed even if some of the conditions given above make it appear that the person should be treated as an employee. However, it is important to obtain clearance from HMRC before entering into any such arrangement.