AITI Chartered Tax Adviser

Self-employed or employed?

In general, a self-employed person can claim more deductions than an employee, providing more opportunity to reduce his tax bill. You can also claim capital allowances. On the other hand, you are exposed to greater risk if your business does not succeed.
The following summarises the characteristics of employment and self-employment, and shows the tax consequences of each status.

(a) Nature of contract: A self-employed person is engaged under a contract for services; an employee is engaged under a contract of service.

(b) Nature of relationship: A self-employed person is an independent contractor in business on his own account; an employee is engaged under a master-servant relationship.

(c) Degree of control over work: A self-employed person controls how the work is done; Employer controls how the work is to be done

(d) Links to organisation: A self-employed person is not part of the organisation he works for – he does not a desk or a fixed place at which he must “turn up” each day; an employee is part of the organisation he works for and will have a desk or fixed place where he works each day.

(e) Premises: A self-employed person provides his own premises; an employee works at his employer’s premises.

(f) Equipment and tools: A self-employed person provides his own equipment and tools; an employee uses his employer’s equipment and tools.

(g) Helpers: A self-employed person hires his own helpers and can provide a substitute if he cannot be present; an employee works with fellow employees and cannot provide a substitute for

(h) Materials: A self-employed person supplies materials for the job he is working on; an employee uses materials supplied by his employer.

(i) Financial risk: A self-employed person bears the cost of workmanship that is defective or late, and profits from work completed satisfactorily. An employee bears no risk.

(j) Earnings: A self-employed person’s earning are regular; an employee receives a regular wage or salary.

(k) Overtime: A self-employed person is not entitled to overtime pay, sick pay, holiday pay; an employee is.

(l) Insurance: A self-employed person provides his own cover; an employee is covered by his employer’s insurance.

From a tax point of view:
(a) Deductible expenditure: A self-employed person is entitled to deduct expenditure incurred wholly and exclusively for the purposes of the trade or profession; an employee is only entitled to deduct expenditure incurred wholly, exclusively and necessarily in the performance of the duties of the employment. The words “necessarily” and “in the performance” make this a very difficult test to satisfy.

(b) Payment of tax: A self-employed person pays preliminary tax in advance of the income being earned, and can claim capital allowances on plant and machinery etc used in the business; an employee suffers tax through PAYE system and can claim: a PAYE credit, tax-free termination payment, tax-free pay restructuring payments, seed capital relief and compensation for change in work practices.
(c) Records: A self-employed person must register for VAT and keep books and records; an employee has no such obligation.

(d) Legal obligations: A self-employed person has no legal protection; an employee is protected by various legislation: Trade Disputes Act 1906, Redundancy Payments Acts, 1967-1979, Minimum Notice and Terms of Employment Act 1973, Holiday (Employees) Act 1973, Anti-Discrimination (Pay) Act 1974, Employment Equality Act 1977, Protection of Employment Act 1977, Unfair Dismissals Act 1977, Maternity (Protection of Employees) Act 1981, Insolvency (Protection of Employees) Act 1984.

(e) Protection: A self-employed person has no welfare entitlements; an employee can qualify for jobseeker benefit.