Contractors' Questions: Is sole trading best to avoid deemed employment tax?
Contractor’s Question: I want to set up as a sole trader offering IT consultancy services to initially one paymaster but only for a specific period of time -- let’s say just over a year. Is there a threshold of services provided (i.e. percentage of my overall workload) as a sole trader to only one paymaster before being deemed employed in my work for the paymaster?
Expert’s Answer: Unfortunately, there are no defined thresholds either in terms of time working for one client or as a percentage of overall workload before being regarded as an employee of the client.
It all depends on the working relationship with the client. It is possible to work for only one client for a period of 12 months or longer and still be regarded as self-employed and, conversely, work for several clients on a self-employed basis but still be treated as employed on a short-term contract because of the particular terms and nature of that contract.
Having said that, in general terms, working for only one client for a period of more than one year is likely to increase the risk that the arrangement may be regarded as an employment one, so you would need to look carefully at both the written terms of any contract between you and the client (to see if it has the usual hallmarks of a contract for services -- i.e. a self-employed arrangement) and also the actual working relationship to determine how far the arrangement could be challenged by HM Revenue & Customs. The nature of the work itself may also be a factor.
Whether a worker is classified as an employee for tax purposes depends on a number of established factors, which ContractorUK has a comprehensive summary of.
But the main factors are:
- Will you have to undertake the work personally or will you be able to use hired help or subcontract any of the work to someone else?
- Will you have reasonable autonomy in deciding when, where and how to carry out the work without supervision?
- Will you have to provide any of your own equipment to carry out the work or are you simply providing a labour only service?
- Will you be able to profit from sound management of the services or make a loss or take a lower profit due to having to rectify unsatisfactory work or other circumstances?
- Do you have any other trappings of being in business on your own account (i.e. office, website, marketing materials etc?)
To reduce the chances of the arrangement being seen as an employment one, you should also be engaged on a specific project or series of projects with no enduring obligations after the project has been completed rather than making yourself available for a “set term with a view to further renewals.” Simply being available for a series of tasks as they arise is more consistent with an employment relationship.
In summary, to reduce the possibility of the arrangement being seen as an employment one, you should ensure that the written contract is consistent with a contract for services (rather than an employment contract) and that the actual working relationship mirrors the terms of the contract. This will be more important than any percentage of overall workload.
The expert was John Hill, founder of employment status advisory John Hill & Associates.
Editor’s Note: Further Reading – Contractors’ Questions: Can I beat IR35 by being a sole trader?