What makes you a self-employed contractor?

Being self-employed isn’t just about being your own boss and taking care of your own tax affairs. Being self-employed means you are in business for yourself.

But being in business for yourself doesn’t always mean having an office, a team, a website or even a business name. And it doesn’t always involve having multiple clients. And if you don’t have those things, how exactly do you prove to HMRC that you are genuinely self-employed?

There is not one specific thing that proves self-employment. To prove you are genuinely self-employed, you must be able to demonstrate you are a business in your own right. Having a subcontractor contract can help reduce misunderstandings around employment status.

A contract won’t automatically protect you, but it goes some way to proving that both you and the contractor view the relationship as one of contractor and subcontractor and not one of employer and employee.

What is a self-employed contractor?

A self-employed contractor is exactly what it sounds like. It is an independent contractor who is self-employed – a person who is contracted to provide services rather than a person who is employed by a company.

It doesn’t matter whether you are providing services for multiple clients or one client. What matters is the working relationship you have with the main contractor.

If the relationship is one of employer and employee then you should not be claiming self-employed status simply for tax purposes.

You can’t just decide your employment status based on what suits you. HMRC will not be happy if they decide you are actually an employee disguised as a self-employed subcontractor in order to pay less tax.

Key characteristics of a self-employed contractor

Being employed or self-employed is not determined by one specific factor. If HMRC suspects you are claiming a different status for tax purposes, they will look at several factors to determine whether you are genuinely self-employed.

Pay your own income tax

One of the key differences between employees and self-employed people is the way they pay tax. Employment income is taxed differently to income from self-employment.

An employee has their income tax and national insurance contributions deducted from their wage by their employer before they are paid.

Self-employed contractors are responsible for paying their own taxes and national insurance. If you are self-employed, you must submit a tax return each year, detailing your income and business expenses. HMRC will then let you know how much tax is due and you make payment.

If you are a sole trader, you only have to complete a self-assessment tax return. If you operate as a limited company, you also have to complete a company tax return and pay corporation tax on your profits. If you are registered for VAT, you will also need to submit VAT returns.

In the construction industry, contractors are required to deduct CIS from a subcontractor’s pay. This is passed on to HMRC and can be offset against your tax bill.

Employment rights and benefits

Employees have certain employment rights under employment law. These will usually be outlined in their employment contract.

Employment benefits include holiday or sick pay, parental leave, redundancy pay and minimum wage. They also have rights around unfair dismissal and notice periods. If these rights are breached they can take the employer to an employment tribunal.

Self-employed people have very few employment rights under employment law. They are not entitled to holiday or sick pay and must ensure they earn enough to cover time off. This usually means their hourly rates are higher than the hourly rate for an employee would be.

More control over own work

Being self-employed means you run your own business so you have more control over your work. You choose which clients you work with, the services you provide, and how much you want to be paid for delivering those services.

If you offer specialist skills or have a lot of experience, you can charge higher rates than less experienced contractors.

You may also decide that you want to charge a higher rate for a specific project (for example, if it is particularly complex or requires you to work unsociable hours).

You might also have a right to substitution clause in your agreement. This allows you to send a substitute of equivalent experience in your place if you need to.

Substitutes can be employees of your business or other self-employed subcontractors, but they are representing your business. The main contractor would still pay you and you would then pay the substitute.

Profit and loss

Being self-employed means you have a business. And a business can make a profit or a loss.

If your agreement with the main contractor is that you will rectify any unsatisfactory work at your own cost, then you are at risk of loss. This differentiates you from employees who would rectify the work in company time.

How will IR35 affect your contractual agreement?

IR35 refers to legislation that was introduced to stop freelancers, consultants and independent contractors from avoiding tax.

Too many workers were setting themselves up as a limited company and then providing services to just one client. Essentially, they were acting as employees, but rather than paying tax and NIC on their salary, they paid corporation tax on their profits, which worked out at less.

IR35 was introduced to stop this from happening.

If an independent contractor falls within the IR35 rules, they have to pay tax as if they were directly employed by the company, but they do not get the same employment rights.

IR35 applies to workers who are using intermediaries, umbrella companies or their own LTD company. It does not apply to sole traders.

So if you are a sole trader, you do not need to worry about IR35.

Get your contracts with contractors right with HardHats

If you are an independent contractor or you have subcontractors working for you and you are worried about employment status being misconstrued by HMRC, have a chat with the guys at HardHats.

We specialise in bespoke subcontractor contracts for the construction industry. We’ll document the working relationship so there can be no misunderstandings about whether your workers are employed or self-employed.

Should HMRC ever open an enquiry into the employment status of your subbies, we’ll handle it on your behalf.

You can find out more about how it works here, or chat with us on WhatsApp.