Employed or self-employed

Produced by Tolley
Employed or self-employed

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Employed or self-employed
  • The status tests
  • The importance of case law
  • Ready Mixed Concrete
  • Market Investigations
  • Express and Echo Publications Ltd v Tanton
  • Key status test ― personal service
  • Relevant case law
  • Important status test ― control
  • Key status test ― project based work
  • More...

Many people supply their services to clients, not directly as a self-employed person, but via a company. The tax and NIC advantages of this way of working are significant ― see the Introduction to personal service companies guidance note. For the rules generally, see the Personal service company rules guidance note.

Since April 2000, anti-avoidance legislation, known as ‘IR35’, catches individuals who would be employees of their clients if they had not used a PSC. From April 2017 similar anti-avoidance rules apply to individuals who would be employees of public sector bodies if they had not used an intermediary and these rules are extended to large and medium businesses in the private sector from 6 April 2021, see the Where are we now with personal service companies? guidance note for more details.

The provisions also apply to individuals who are an ‘office-holder’ of the client when the services they provide relate to the duties of that office.

The status tests

In UK legislation, an employee is defined as “an individual who has entered into or works under... a contract of employment” with ‘contract of employment’ defined as “a contract of service or apprenticeship, whether express or implied”.

This is as far as legislation goes. Therefore, the characteristics of employment are dependent on case law concerning the definition of a ‘contract of service’. The authority on this is widely seen as Ready Mixed Concrete. This and other cases are discussed below.

From Ready Mixed Concrete, there are three ‘preconditions’ which are essential for the existence of an employment:

  1. the obligation for personal service

  2. submitting to significant control of the employer, and

  3. consistency with other conditions of employment

The issue of personal service is often seen as focusing around the right of substitution. That is, it is inherently inconsistent with employment to have the right to send somebody else to perform the contracted services. However, this test has become more complex over time as contracts with a substitution clause which is

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