How to Avoid Being a Disguised Employee

Ever since the Nashua Corporation declared that they could no longer provide their employees with a job for life in 1985, the boundary between who is self-employed and who is a disguised employee have been blurred. The tax advantages of being self employed in the UK, and the US for that matter, far outweigh those of being an employee. Consequently, legislation was introduced in 1995, by the then Labour Government, to prevent employees from pretending to be independent contractors.

In this article, you will learn about the five tests that the Inland Revenue applies to anyone who desires to determine his or her tax status.


Please note that this article is not intended to provide tax advice. For that, you need to obtain the guidance of a reputable tax accountant.

Tests

There are five tests that the Inland Revenue uses to distinguish between those who employed and those are merely disguised as such. Further information is available from that agency in IR35.

Mutuality of obligation

This test is probably the most important of them all and examines the relationship between the contractor and the client. Employers are obligated to provide a steady stream of work, and employees are obligated to complete it. The self-employed may work on one or more projects, but always has the right to accept or reject it.

Substitution

This test determines who may delegate or subcontract their work to someone outside of their employer. Employees may not, but those who are self employed can provided there is no conflict of interest with a third party.

W, W, W, & H

This test examines who is to do the work, where, when, and how it is to be done. If the contractor has the final say in these areas, then the worker is considered to be an employee. Flex time and home offices have clouded this issue.

Whose business?

You must be able to prove that the business you work in is quite separate from that of your client's. That means that you are free to market yourself on- or offline, terminate your contract with your client, make your own purchases, and accept the financial risks of being in business.

Direction & Control

This test is similar to the third one. In essence, it asks both parties to describe the relationship between them. For example, who is in charge of you? Is it you, or are you at the beck and call of the other person?