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Does it really matter to the taxman whether I am employed or self-employed?

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There are many reasons why the Inland Revenue would argue that individuals are employed as opposed to self-employed.

Self-employed individuals can claim expenses, which are 'wholly and exclusively' incurred for business purposes. For an employee it is much more difficult to claim expenses as they need to be 'wholly, exclusively and necessarily' in the performance of their duties. Therefore it is more beneficial for a taxpayer to be self-employed, as they will receive tax relief on more types of expenses, which will reduce the amount of tax payable to the taxman.

Many employed individuals do not need to complete a tax return and therefore the Inland Revenue saves time, effort and cost if the individual is taxed under PAYE. Although its likely that most doctors will be higher rate taxpayers and they be required to complete a tax return. Higher rate taxpayers should pay the higher rate of tax on investment income such as interest received on bank and building society accounts.

Status of GP's

GP Principals working in practice are normally self-employed. Salaried GP's, GP registrars, retainers and assistants and also long-term maternity locums would be employed by the practice and taxed under PAYE.

Self-employed GP's may have hospital appointments and strictly speaking this income would be treated as employment income and tax deducted under PAYE. However the Inland Revenue does allow these receipts to be paid gross and taxed with other self-employed income. If the money is pooled in the practice then this is preferable.

Hospital doctors are employed. Some consultants may have private practices and this income is treated as self employed.

A locum who covers for a GP in practice will be treated as self employed. If a locum is supplied by an agency, but is engaged to cover a GP in practice then they would still be treated as self employed and this does not come under the agency legislation. The agency legislation applies only where individuals are subject to the right of, supervision, direction or control as to the manner in which they render their services. In this instance the agency would be required to operate PAYE. Doctors supplied by an agency to work in a hospital are regarded as being supervised and therefore will come within the agency legislation and be treated as an employee of the agency.

Deciding an individual's status

The status of an individual may sometimes be unclear and unfortunately there is no statutory definition of employed and self employed.

To help decide an individuals' status there are factors, known as badges of trade that can be considered in determining whether an individual is employed, or self-employed. Some of these factors are as follows:-

Control

If an individual has a right to exercise control over the amount of work done for the engager then this is more likely to be a self-employed basis. If an individual has no control to the amount of work done they are likely to be an employee.

Provision of Equipment

A self-employed individual would generally provide whatever equipment is needed to do the job. Where an individual is provided with office space and other equipment this would point towards employment.

Financial Risk

An individual who risks his own money by bearing capital/running costs is almost certainly self-employed. Financial risk could also take the form of quoting a fixed price for the work and bearing additional costs. For example if the actual costs are more than the price quoted, a self-employed individual will bear the loss.

Basis of payment

Employees tend to be paid a fixed wage or salary by the week or month.

Part and parcel of the organisation

If the individual has a role within the business structure, and is responsible for other employees, then this may point to being an employee of the company.

Right of dismissal

A right to terminate an engagement by giving notice of a specified length is a common feature of employment. It is less common for self-employed, which usually ends on completion of the task.

Employee Benefits

Employees are often entitled to sick pay, holiday pay etc. However the absence of these does not necessarily mean that the individual is self employed.

Length of engagement

Long periods working for one engager may be typical of an employment, but not conclusive. It is still necessary to consider the terms and conditions of each engagement.

Intention

It is the reality of the relationship that matters. It is not enough to call a person self-employed if all the terms and conditions of the engagement point towards employment.

The above factors can only be used as a guide in deciding an individual's status. The Inland Revenue will look at the overall picture. Is the individual in business on his or her own account or are they a person working as an employee in somebody else's business.

If you are an employer and want to decide whether someone should be treated as employed or self-employed and are not sure, then you should seek professional advice. The individual may also be legally entitled to the rights of an employee even if they are being paid gross. If the Inland Revenue subsequently hold that the individual is an employee, it is the employer who will be liable for the PAYE and employer's national insurance as the money you have paid will be treated as net pay.


Limited Companies and IR35

The IR35 legislation was introduced to attack situations where an individual sets up a personal service company between himself or herself and the main contractor or client. From the Inland Revenue's point of view it was designed to correct avoidance of national insurance contributions where the owner of the company took most of his/her remuneration as a dividend.

If you have recently set up a limited company and are only working for one main client then you may need to seek advice as to whether you fall into IR35. The important issue regarding IR35 is if without working through a company the arrangement would be that of employment then you are likely to fall into IR35 unless you have an employment proof contract.

October 2003