Freelancing body maps out the face of self-employment
The Association of Independent Professionals and the Self Employed (IPSE) has called for a statutory definition of self-employment to end confusion and uncertainty, and ensure that working for yourself is seen in a positive light. Their solution is to determine self-employed status by reference to a ‘Self-Employment Matrix’ which tests four categories and attaches points to each one. Depending on the total score, the person will either be self-employed or not, or something in between.
The matrix, which can be used by workers and engagers alike, will highlight those cases who fall within grey areas and the factors that need to be addressed for the engagement to be considered genuine self-employed.
How it works
Thirteen factors are considered which are weighted by importance and grouped by category. The scores are then totted up to produce a final score that will reveal the status of the worker as follows:
| Status | Rationale | Score |
|---|---|---|
| Self-employed | Evidence conclusively points towards self-employment | 65+ |
| Likely to be self-employed | Evidence suggests self-employment | 50 – 64 |
| Unlikely to be self-employed | Evidence suggests that there are many characteristics of an employee working for an employer | 35 – 49 |
| Not self-employed | Evidence conclusively points towards engagement not being one of self-employment | Less than 35 |
1. Autonomy
| Factor | Definition | Score |
|---|---|---|
| Lack of mutuality of obligation (MOO) | An employer is obliged to provide work and the employee is obliged to complete it. Where this mutuality does not exist during the contract then there is an absence of MOO. | 15 |
| Right of substitution | The unfettered right to send a substitute worker in the place of the individual. | 5 |
| Use of a substitute | Substitute is actually used. | 10 |
| Lack of exclusivity | Worker is free to provide their services to other clients. | 5 |
| 35 |
2. Control of process and working environment
| Factor | Definition | Score |
|---|---|---|
| Control of tasks (what is done) | Control of the day-to-day work the individual undertakes. The worker should not have tasks dictated by the client or the client be able to move the worker from task-to-task at their whim. | 15 |
| Control of method (how the work is done) | The client should not have the right to dictate the method and process of working. | 10 |
| Control of hours | Worker should have full control of the time they work. Set deadlines for delivery of work will not affect this test. | 5 |
| 30 |
3. Business risk
| Factor | Definition | Score |
|---|---|---|
| Pay per job/task | Payment by reference to completion of a job/task rather than by time. | 10 |
| Number of clients | Two or more concurrent clients. | 5 |
| Entrepreneurial activity | An entrepreneur takes initiative and risk in order to profit. If the worker has an ongoing responsibility for creating business (through marketing, networking etc). | 5 |
| Rate of pay | Right of the worker to set or negotiate their own pay scales. | 5 |
| 25 |
4. Level of integration in client business
| Factor | Definition | Score |
|---|---|---|
| Representation | Worker should not appear to be representing their client, e.g being required to wear client uniform. | 5 |
| Equipment and tools | Worker uses their own tools and equipment to complete the work, e.g a designer using their own laptop to carry out the work. | 5 |
| 10 |
Where an engagement falls into the grey area, then eight additional factors will come into play to form a decision, these being:
| Control of location (where work is done) | If an individual can choose where they work it points to self-employment. |
| Lack of supervision | Supervision is the action or process of overseeing or monitoring what a person does or something that is to be done. If the client has the right to check what the individual is doing then they are subject to supervision. No supervision indicates self-employment. |
| Liability | Where an individual is held liable for any problems that occur then this points towards self-employment. |
| Expenses | Business expenses met by the individual and not re-charged to the client is indicative of self-employment. |
| Finance and tax administration | Responsibility for finance and tax administration, e.g invoicing and completing tax returns is something a self-employed person undertakes. |
| Lack of economic dependency | If 80% or more of an individual’s total annual income over a two year period is received through work done for a single client, then this indicates that they are dependent on that client in a similar way to an employee. |
| Length of contract | Contracts that last longer than two years are akin to an employment relationship as this is the qualifying period employees have to reach in order to gain additional rights at work. |
| Benefits | Employee type benefits, e.g free onsite parking or free gym membership should not be available to self-employed workers. |
Illustrations
Samantha – IT Contractor (70 points)
Samantha has been contracted to help implement the migration of data from old servers to a cloud-based solution for a client. The contract has been in place for six months, but prior to this, she worked on two separate one-year contracts for the same client, on different projects. She has negotiated her rate of pay and she has the right of substitution, but has not used a substitute. Samantha has control of her working processes and hours, but normally has to work at the client’s site because the work requires her to.
She is paid a day rate rather than on completion of the work, and the work becomes the property of her client. She is not, however, required to work exclusively for this client, completes her own tax and finance administration and is liable for any mistakes she makes in the work, as well as any loss to the client resulting from this. Overall, the matrix shows that Samantha should be considered self-employed.
| Indicators of self-employment | Indicators of employer-employee relationship |
|---|---|
| Samantha has negotiated her rate of pay | Samantha is paid on a monthly basis |
| She has a contractual right of substitution | She is required to work on the client’s site |
| She controls her own working processes and hours | She does not take ownership of her work |
| Contract is non-exclusive | |
| She is liable for any loss to her client caused by her own negligence | |
| She is responsible for her tax and finance administration |
Parisa – Gig economy taxi driver (60 points)
Parisa uses her own car as a taxi on a part-time basis to supplement her income. She works through a mobile phone app that identifies potential customers in the area. Parisa turns the app on when she wants to work and turns it off when she doesn’t, and can choose which area she starts her work in. She also has the right to use a substitute, but has not used one. She can choose which customers she picks up and is able to turn down fares. Parisa is also paid by every journey and chooses how and when this is done.
Drivers are, however, rated by customers, and if they fall below a certain rating they can no longer use the app. Parisa also doesn’t display very many features of a person running their own business. The app generates the work for her and decides the rate of pay according to demand. The matrix shows Parisa is likely to be self-employed.
| Indicators of self-employment | Indicators of employer-employee relationship |
|---|---|
| Parisa does not have any obligation to accept work | She is rated by customers and cannot allow this rating to fall below a level set by the app |
| She chooses her hours, location and which rides to accept | She cannot negotiate her rate of pay |
| She is paid for every task | |
| She provides her own car |
Whilst the IPSE are to be commended for attempting to produce a solution to the self-employment conundrum, this looks like an extended version of the Business Entity Tests (BETs) that was abandoned by HMRC two years ago amidst criticism that the weighing attached to certain tests was imbalanced. However, the actual substitution test in BETs secured 20 points which would have sealed a contractor’s self-employed status. As an absence of personal service still remains a key factor in determining employment status, why then does the IPSE not attach greater importance to this test?
Another example of skewed scoring is the provision of equipment by the worker to undertake the work. IPSE allocate five points to this test whereas HMRC concede that where a worker provides essential equipment or major items that are fundamental to the job to be done, then this is a very strong pointer to self-employment. For example, a taxi driver who provides their own vehicle is very likely to be self-employed. Perhaps a re-think is required as to the weighting attached to some of the tests?
To be fair to the IPSE they do invite feedback about how the factors and scoring system can be tweaked to make their matrix more effective.
Rather than criticise the IPSE, I would encourage them to continue with their efforts, along with all those involved in the freelance industry, to seek a solution to the longstanding status issue, in particular, IR35.
The full document titled, ‘IPSE response: Review of Employment Practices in the Modern Economy May 2017’ can be found here.
Is it too simplistic to suppose that there are are 4 situations:
. worker and Client both want the relationship to be business – business
. worker and Client both want the relationship to be employee – employer
. worker wants to be employed and Client wants business – business
. worker wants to be business – business and Client wants employee – employer
This boils down even further – does the worker and the Client agree on the relationship or not.
If they agree then the relationship is clear it is either business – business or employee – employer. So remuneration flows as expected and HMRC receive their tax.
If they don’t agree then, this would be identified quite quickly as remuneration will not flow in the way that is expected by both parties and, they need to stop the relationship. It could then be up to the courts to decide the true relationship, that had transpired for say 2 months at the most, as they do now. The case outcome determines who receives what and HMRC receives the correct tax due, based on the court decision.
HMRC don’t need to be involved, they just collect the tax.
Have these people been infiltrated by hmrc. Law, for clarity? In the famous echo case the judge summed up quite eloquently that where there is a right of substitution then the contract cannot be one of employment.
Wake up clowns, the law already states that, WITH CLARITY. This looks like hmrc’s attempts to just apply a small percentage to factors that are so fundamental that they legally define you as not employed. And unfettered right of substitution or any lack of mutuality of obligation means you are not employed,