Employment status refers to an individual’s legal standing in the workplace, which determines various rights and responsibilities for both the employee and employer. The law provides extensive statutory protections for employees; however, only certain rights, such as holiday pay and minimum wage, are available to workers. In contrast, self-employed individuals do not receive any of these protections.
Self-employment is not clearly defined by either tax or employment law, and this is further complicated by the different classifications used in each area. For instance, under employment law, there are three types of workers: employees, workers, and self-employed individuals. In contrast, tax law only distinguishes between employees and self-employed individuals.
The government plans to hold consultations on establishing a single status for workers, excluding genuine self-employed individuals. They argue that creating this unified classification will reduce instances of ‘bogus’ self-employment and simplify the working environment for both employees and employers.
This article will focus solely on the tax, and by extension, the National Insurance, (‘NI’), treatment of employment status. It is important to note that there is no legal definition of employment nor self-employment, so determining employment status is largely based on the underlying facts for each engagement and the decisions of the courts, otherwise known as tax case law. Among the many cases that have arisen over the years regarding employment status, the case that is most frequently cited to establish whether a contract of service (i.e. employment) exists is Ready Mix Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968].
In his judgment, MacKenna J considered what is meant by a contract of service. He said:
A contract of service exists if these three conditions are fulfilled.
(i) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master.
(ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master.
(iii) The other provisions of the contract are consistent with its being a contract of service.
As to (i). There must be a wage or other remuneration. Otherwise there will be no consideration, and without consideration no contract of any kind. The servant must be obliged to provide his own work and skill. Freedom to do a job by one’s own hands or by another’s inconsistent with a contract of service, though a limited or occasional power of delegation may not be….”
This established that in order for there to be a contract of service (one of employment) there must be:
A. Right of Control: There should be a right of control over the worker. Without any control, i.e. what, where, when and how the work is performed, a contract of service cannot exist. While this right is important, it is not the only determining factor
B. Personal Service: The worker must provide personal service, although a limited right to delegate does not negate a contract of service.
C. Consistency with a Contract of Service:
Other factors should align with a contract of service (C) which includes:
1. The extent of integration within the business
Is the worker an integral part of business of employer or is the assignment incidental to activities of business.
2. Provision of equipment, particularly major items
3. The duration of engagement
Is it a long-term engagement or a short-term engagement covering a specific assignment.
4. Acceptance of work offered
Is the worker required to accept work or not obliged to accept work offered.
5. Work routines
Is the worker required to work specific hours and attend a place of work on a regular basis or free to work as and when the individual wishes if the assignment is performed.
6. Remuneration
Is remuneration paid at set regular intervals (for example, weekly or monthly) or is the remuneration on a fee basis or based on the amount of work performed for which the individual raises invoices.
7. The ability to benefit from effective management
Is the worker unable to profit from sound management of tasks, has no risk of financial loss from the working relationship or are they able to profit from sound management of the assignment, and are responsible for their own management and investment decisions, and risks financial loss to correct unsatisfactory work.
8. Other tasks
Are they restricted to working for one person at a time or free to undertake work for others.
9. Separate business
Does the work arrangements have none of the characteristics of a separate business or does the worker have his own business address, puts in his own capital, which is at risk, and has overheads (for example, premises or employees).
10. Liability to third parties
Is the worker covered by the employer for any damage caused by the work or is he responsible for damage caused by the work and has appropriate insurance.
Ownership of significant assets, financial risk, and profit opportunities generally indicate a lack of such a contract.
These points help determine the presence of a contract of service.
Over the years, both HMRC and the courts have indicated that employment status should be determined by considering all relevant factors and then making a holistic decision. In some cases, judges have suggested that factors such as operating a business on one’s own account may carry more weight than, for example: control, the right to personal service, and mutuality of obligation, even where those elements are strongly present.
Intermediaries legislation
Individuals often try to bypass their employment status by working through intermediaries such as Personal Service Companies (‘PSCs’). A PSC usually consists of two directors or one director and a secretary, often spouses, with no other employees and typically only one worker providing services.
The intermediary generates most of its income by supplying the worker’s services, which would be considered employment if the client hired the worker directly. In this setup, there is no direct contract between the worker and the client; instead, the contract is between the intermediary and the client, with payments made to the worker through the intermediary.
This arrangement benefits the client by eliminating any PAYE obligations, while the worker lacks employment rights, and the client has no employer National Insurance (NI) costs.
The rise of the PSC structure began in the 1990s, when IT employees would “resign on a Friday and return on Monday” to perform the same work, but under the umbrella of a PSC, with the PSC being paid on a gross basis. The government, aware of the resulting loss in Income tax and NI, introduced the Intermediaries legislation (found in Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003). This legislation is commonly referred to as IR35 (named after the 1999 Inland Revenue press release, which announced it) took effect in April 2000.
The legislation applies in the following circumstances;
- an individual (the worker) provides their services to a client via an intermediary which can be;
- a company
- a partnership*
- an unincorporated association, or
- another individual.
*HMRC’s view of the finding of the First Tier Tax Tribunal (‘FTT’) in HMRC v Gary Lineker Media is binding only on the parties and was not subject to a further appeal hearing at the Upper Tribunal. Notwithstanding this, HMRC maintains that an English general partnership where a sole worker is executing a contract to provide the services is a third party intermediary within the scope of Chapter 8 Part 2 ITEPA 2003.
The objective of the IR35 legislation is to ensure that workers engaged under terms similar to employees paid the same amount of Income tax and NI, regardless of the structure (i.e. the PSC) in place between the worker and the client. Initially, PSCs were responsible for determining if contracts fell within IR35 and operating PAYE if they did.
However, HMRC found that many PSCs were non-compliant. To address this, the Off-Payroll Working Rules (‘OPW’) were introduced in the public sector in April 2017 and extended to the private sector in 2021. The main change was the shifting of the responsibility for assessing employment status from the PSC to the end user or client, making the fee payer accountable for operating PAYE if the contract is within IR35.
The OPW rules, introduced in 2021 for the private sector, assign employment status review responsibilities to end clients or users, including the issuance of Status Determination Statements and ensuring labour chain compliance. These rules apply only to medium and large entities. If a client is classified as small under Section 382 of the Companies Act 2006, the responsibility for the employment status review and any PAYE obligation falls to the PSC or intermediary and not the end client/fee payer.
A corporate entity is considered medium or large if it meets at least two of the following criteria for two consecutive financial years:
- Turnover exceeding £10.2 million (rising to £15 million from April 6, 2025)
- Balance sheet total over £5.1 million (increasing to £7.5 million from April 6, 2025)
- More than 50 employees (unchanged from April 6, 2025)
If a company does not meet at least two of the criteria for two consecutive years, it will be reclassified as small. For groups, the sizes of all members are combined to determine status.
How do the Courts decide Employment status?
The starting point is to review the engagement contract, obtain the relevant facts of the working relationship from both the engager and the worker and then form a ‘hypothetical contract’ of the actual working terms and conditions. Unfortunately, as proven in the Supreme Court decision of Autoclenz Ltd v Belcher and others, the reality of the working relationship does not always mirror that contained in the contract.
Once the hypothetical contract has been drawn, the employment status indicators mentioned above are used to determine if the contract is one of employment or self-employment.
What happens if you get the employment status wrong?
Employment status is a significant risk and is always reviewed during HMRC compliance checks. If HMRC disputes a worker’s status, they will assess Income tax and NI liabilities for the past six completed tax years if the worker is a sole trader. For those engaged through a PSC or intermediary, assessments will start from April 2021, provided the end client is a medium or large entity in the private sector.
Summary
In the Autumn Statement 2024, the Government announced the recruitment and training of 500 new compliance officers. Furthermore, during a speech marking the 20th anniversary of HMRC, hosted by the Chartered Institute of Taxation (‘CIOT’) and Institute of Chartered Accountants (‘ICA’), the Exchequer Secretary James Murray MP revealed that an additional 600 compliance staff will begin work on early 2025. The use of AI will also help better target cases for review.
This initiative, along with investments to modernize HMRC systems and new legislation aimed at tackling non-compliant tax avoidance, is expected to raise £6.5 billion per year by 2029/30. It is anticipated that HMRC compliance activity will increase in the 2025/26 and subsequent tax years.
Understanding employment status can be complex, as even judges have arrived at different decisions based on seemingly similar facts. However, the tax cases mentioned below should be reviewed and lessons learnt taken on board and implemented.
Our article in the Winter Employment Tax Briefing offers guidance on navigating the complexities of employment status, drawing lessons from recent cases involving media celebrity Kaye Adams (AHPL v HMRC EWCA Civ 501) and PGMOL v HMRC [2024] UKSC 29.
Additionally, HMRC has produced guidance on how to comply with IR35 OPW rules to avoid common mistakes.
What can companies do to remain compliant?
It is anticipated that HMRC will use the guidance to assess companies’ employment status processes, controls, and governance, so it is recommended that you review your Off Payroll Worker population to ensure that the correct employment status determination has been made. As shown in recent cases such as Phil Thompson’s (UT Neutral citation number: [2025] UKUT 00094 (TCC) UT (Tax & Chancery) Case Number: UT-2024-000044), having a robust contract which is a true reflection of the working relationship (i.e. self-employment will help defend any employment status challenge by HMRC. You should also review and amend your employment status processes, as necessary to comply with the prevailing case law.
