Subscribers: please see Employment Status, the detailed version of this guide.

A note of caution

Exercise caution when relying on answers and following a checklist solely on the basis of a written contact. You may think that you have "an IR35 proof contract" but if the parties act differently their actions will override written provisions. Any changes agreed by the behaviour of the parties may be enough to vary terms.

  • For IR35 an intermediary needs to evaluate the hypothetical contract between the individual and the end-client: the written terms of any contact between the end client and and intermediary or individual and intermediary may sometimes be persuasive however again it is the reality of the situation that is considered by the courts.
  • From 6 April 2017 where an individual works via a Personal Service Company for a client in the public sector, responsibility for operating PAYE and effectively IR35 moves from the PSC to the public authority or agency supplying the worker. See Personal Service Companies & tax.
  • Following Autoclenz Ltd v Belcher and ors [2011] a Supreme Court decison, those who engage individuals over a number of years on a self-employed basis may wish to review their relationships to ensure that no employment rights have been created. The court here looked beyond the written terms of the contract and after interviewing all involved concluded that the workers were in fact employees.
  • In another important 2011 decision, Talentcore v HMRC, the Upper Tier Tax Tribunal decided that staff at an airport duty free counter were not employees because they enjoyed an unfettered right of substitution. This case illustrates how difficult it can be for HMRC and taxpayers alike to work out employment status.
  • In  Jensal Software Ltd v HMRC [2018] the First tier tribunal found an IT contractor was not under IR35; the level of control exercised by the Department of Work and Pensions (DWP) as engager fell far below the sufficient degree required to demonstrate a contract of service. 

Employment status checklist

To determine status you must consider whether an individual is engaged under a "contract of service", or a "contract for services". The former will evidence an employment relationship the latter self-employment.

  • Contract terms may be expressed in writing, however unwritten or implied variations also affect the actual relationship between the person engaging the individual.
  • The courts and HMRC consider a series of different factors to determine employment status. In each case it is necessary to weigh up their importance before considering the fuller picture.

This checklist provides a quick guide to the key employment indicators that may be used to denote whether an individual is employed or not.

Factor Self-employed Employee
Personal service Will provide own services, but may also sub-contract work to others, or bring in outside assistance. Only provides his personal services.
Mutuality of obligation Is free to accepts or turn down work if he desires. The engager is under no obligation to offer any work, or further work.  The employer is obliged to offer work, and the employee is obliged to do as the employer requests.
Right of control Likely to be in control of most aspects of the work done. An employer may control "what", "how", "where" and "when" work is done.
However, a highly skilled employee may also exercise "what" and "how" also as the employment demands.
Right of substitution May sub-contract work, or bring in assistance. Depends on nature of work; an individual may be engaged because of their personal reputation or skill and so no substitute will be acceptable. It is rare for an employee to have the right to appoint a substitute.
Provision of own equipment Will normally supply all small tools and bring in or hire in plant. May sometimes supply own small tools or equipment: employer will provide all plant and machinery.
Financial risk/ablity to profit Will quote on a job-by-job basis. Is able to make more profit by more efficient working, or may incur loss if overruns on time, or if required to rectify defects in own time. Paid whatever work is done,benefits from the National Living / Minimum Wage and statutory holiday entitlement. An employee will bear little risk unless exceptionally work directly relates to a bonus or commission scheme. Or, if poor work affects appraisal for promotion or other benefits.
Opportunity to profit Can profit if work is performed efficiently, or from re-charging and making a profit on materials. May only profit under a bonus or incentive scheme. However, may benefit from tips, or payments from third parties.
Length of engagement Generally a fixed-term or short-term contract. Contract will generally be open ended after probation period (if any).
Part and parcel of the organisation May become "a fixture" in that his work brings him to the company regularly, but acquires no additional responsibilities or privileges as a result. Is capable of being promoted, or manages other staff. Part of works pension, or SAYE scheme.
Employee type benefits Unlikely to be entitled to any type of benefits. May be invited to functions with other external suppliers. Part of pension scheme, enjoy canteen or sports club facilities, car parking, attends staff functions.
Right to terminate contract If other party is in breach. Would normally give notice under specified contract term.
Personal factors May be engaged because of skills, reputation etc. Personal factors may be the reason for appointment.
Mutual intention The intention of the parties should be stated in written contract. This may not be persuasive if in reality the parties behave differently and should be given minimal weight. If the parties intend the relationship to be one of employment it is difficult for the courts to say otherwise. In most cases the parties will have agreed written terms of employment and the employee will have enforceable rights under employment law.

Other factors

There are additional factors which may also be highly persuasive in deciding whether an individual is in business in their own right. The importance of each factor can only really be weighed up by considering the whole business in the round. See our subscriber guide: Employment Status.

In March 2017 HMRC published a new Check Employment Status for Tax (CEST) tool. This can be used by workers, agencies and engagers to see whether a worker is employed or self-employed for tax purposes.

The CEST has some short-comings and will not be suitable for certain cases, see Employment Status for further details.