Top 10 myths of self employment

• HM Revenue & Customers sets the rules on employment status

Untrue! Whether somebody is employed or self-employed is decided by judges in cases heard in courts and tribunals. With very few exceptions for a handful of specific industries, there is no legislation on what makes somebody self-employed, and the tax office can only give its own view, which carries no more weight than yours or mine. Many court decisions show that HMRC commonly get employment status wrong.

• You can’t be self-employed and work for only one person

Totally untrue! Employment status is decided by the terms of your contract, not who you work for. Our team have personally defended hundreds of employment status cases successfully where there was only a single engager, and court decisions show this applies even where the person worked for a single engager exclusively for over 20 years!

• If you work for the same person for a long time, you must be an employee

After reading the last myth, you already now know that this is – untrue! Employment status is decided by the terms of your contract, not the length of that contract. If you sign and employment contract and work for only one day, you will still be an employee. On the other hand, if you agree self-employed terms you will be self-employed- even if the contract continues for years. As mentioned above, the courts are quite happy to accept self-employed arrangements for decades on end, providing self-employed terms have been agreed.

• If you are self-employed, you have to raise an invoice

Nonsense! Self-billing arrangements are common in many industries. It is incredible that some tax inspectors still take the view that genuinely self-employed individuals raise invoices, when HMRC has published its own VAT procedure for self-billing.

• You can’t be self-employed if you’ve previously been an employee working for the same person

HMRC even have a name for this: the ‘Friday to Monday scenario’. So, is it possible to be an employee on Friday and come back on Monday as a self-employed worker? Absolutely! In fact, there are many court decisions where exactly this has happened, and the workers have been found to be self-employed. In one case, a group of dock workers were all laid off to reduce costs, but then came back to do the same work but on a self-employed basis. The company re-engaged them on self-employed terms, so the courts agreed that they were genuinely self-employed.

• If you’re self-employed you have to work on a fixed price for the job

Untrue! We have seen many unwieldy arrangements where people have tried to make an hourly wage look like a fixed price. Apart from being obvious and quite transparent to HMRC, these schemes are totally unnecessary. Payment on an hourly or day rate is hardly ever a decisive factor in deciding somebody’s employment status. Many professional firms charge by the hour, and providing self-employed terms are in place, the basis of payment is not going to make somebody an employee.

• If you’re doing the same job as an employee sitting next to you, you must be an employee yourself

Wrong! We have heard many tax inspectors argue this. It is strange that they never seem to argue the other way around: that the employee should be self-employed because they are sitting next to a self-employed person doing the same job! To be fair to HMRC, even their own instructions say that it is possible for one person to be self-employed and the other to be an employee even if they do the same work, as long as they have different terms and conditions in their contract (HMRC Employment Status Manual, paragraph ESM0003). However, this does not appear to have filtered through to many tax inspectors, and it is another common myth of employment status.

• If you don’t give the worker a contract, they can’t be an employee

Untrue! This is one of the more dangerous myths. Just because a worker does not have a written contract, they could still be an employee. Employment contracts can be written, oral, or even implied. If you do not put a written contract in place you will have missed the opportunity to set out self-employed terms, and HMRC (or even the worker) could argue more easily that they are an employee. To add insult to injury, if an employment tribunal finds that they are an employee you could be fined up to 4 weeks’ pay for failing to give written particulars of employment.

• What happens in practice overrules what’s written in the contract

HMRC will tell you this every time. Why? Because if you have a good written self-employed contract then HMRC will want to ignore it so that they can argue for employment. Unfortunately for HMRC, the law does not allow contracts to be ignored so easily. Providing the contract is a genuine agreement between you and the worker, it does not matter what happens in practice. Agreements are defined by what is agreed, not how they are performed. For example, if you genuinely agree a worker can send a substitute worker in their place, it is totally irrelevant whether or not a substitute worker is actually sent.

And in the interest of balance…

• If you are registered for CIS, you are self-employed

Untrue! In the construction industry registering for CIS simply means giving HMRC a few personal details. HMRC do not decide whether or not you are going to be self-employed when you take a job. Many contractors rely on CIS verification as proof of self-employment – this is extremely dangerous as verification tells you nothing other than what tax rate to deduct if the worker is genuinely self-employed.

DISCLAIMER – This resource has been produced by Chartergate Legal Services Limited as a general overview of the law. It is no substitute for specific professional advice given on the basis of your own circumstances and should not be relied on as such.