There are three main ways which in which people can earn their living: (1) as an employee; (2) as a sole-trader and (3) as a director/shareholder of a limited company. Each way of working is subject to a separate set of tax rules and so the route taken can have a significant impact on your tax bill. In most cases, it will be clear if someone is an employee as opposed to being self-employed, and so which set of tax rules to apply. However, there are engagements which fall into the ‘grey area’ between employment and self-employment. Also, it may be that a situation which has all the hallmarks of employment is described as self-employment in order to secure a tax advantage.
So how do you decide your employment status, or the employment status of someone you are looking to take on, for tax purposes? HMRC have provided an online tool which they hope will assist workers and businesses in this area; simply answer a few questions about the arrangement and HMRC will let you know what they think the nature of the engagement is. Best of all, and providing you answered the questions honestly, HMRC will stand by the result giving you confidence that your tax affairs won’t be challenged. And you don’t have to worry about any follow-up from HMRC; use of the service is anonymous.
All in all, we recommend that you use the tool if you are unsure of your employment status for tax purposes. But just remember that the tool will only give HMRC’s opinion on the rules based on a limited amount of information. If you don’t agree with the result, and feel that you need a second opinion, be sure to get some advice from an accountant.
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