You send invoices. You have a business bank account. You might even have a logo, a website and a UTR number. So you’re self-employed. Simple.
HMRC doesn’t read your contract and take it at face value. It looks at what is actually happening in the working relationship. The label you’ve given yourself, or the label a client has given you, carries much less weight than the day-to-day reality of how the work is arranged, delivered and controlled. When the two things don’t match, it’s the reality that HMRC acts on, not the paperwork.
This matters whether you’re a contractor working through your own business or a company that pays people on a self-employed basis.
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What Does HMRC Actually Look At?
There’s a common assumption that employment status works like a checklist. Tick enough boxes and you’re self-employed.
HMRC is clear that there’s no exhaustive list of factors. Employment status is determined by looking at the overall picture of the working relationship. A range of things can be relevant: who controls the work and how it’s done, whether the worker must carry out the work personally, what financial risk exists, whether there’s an obligation on both sides to offer and accept work, whether the worker receives benefits like holiday pay or sick pay, and how integrated the individual is into the client’s business.
No single factor is decisive. A court or HMRC inspector considers all of them together.
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Can You Send Someone Else to Do the Work?
The right to substitute, being able to send a suitably skilled replacement rather than doing every piece of work yourself, is one of the factors that often comes up in self-employment cases, and it has to be genuine to carry any weight with HMRC.
A contract clause that says “the worker may provide a substitute” while everyone involved understands that the individual is expected to turn up personally tells HMRC very little. What it looks for is whether the substitution right reflects the actual arrangement. In practice that means the worker chooses and pays the substitute and continues to invoice the client directly. A client hiring someone because they specifically want that person, and no one else, looks much more like employment than a business-to-business arrangement.
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What About Control and Financial Risk?
Control is one of the most significant factors HMRC considers. It focuses on the right to control: who decides what work gets done, when it happens, where it’s carried out and how it’s approached. A highly skilled professional might be left to get on with their work without much direction, but if the contractual right to direct them sits with the client, that right remains relevant to the status assessment.
Financial risk matters too. A genuinely self-employed person can make a profit or a loss. They have costs they bear themselves, they correct mistakes at their own expense, and they may have multiple clients rather than relying on one source of income.
Owning your own equipment, paying for your own insurance and training, and covering your own transport costs can all support a self-employed picture when taken alongside everything else.
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Why Does This Matter Right Now?
HMRC’s focus on employment status hasn’t eased off. The off-payroll working rules, often referred to as IR35, already require medium and large businesses to assess the status of contractors they engage. But even outside those formal IR35 obligations, HMRC has the ability to challenge employment status directly, and the consequences of getting it wrong can reach back years.
A business that has paid contractors as self-employed for three years and is later found to have gotten the status wrong may face unpaid PAYE, National Insurance contributions, interest and penalties. The contractor may also face their own tax liability. The CEST tool, HMRC’s Check Employment Status for Tax, offers a way to assess a specific engagement and HMRC says it will stand by the result, provided the information entered is accurate.
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What Should You Do If You’re Unsure?
If you’re paying contractors, don’t rely on their self-employed status simply because they told you they were, or because they send you an invoice. Look at the actual working arrangement. Who controls the work? Is there a genuine substitution right? Does the contractor take real financial risk? Are they integrated into your team in the way an employee would be?
If you’re working as a contractor, the same questions apply to your own situation. HMRC’s CEST tool is a reasonable starting point for assessing a specific engagement, but where the picture is genuinely complicated, speaking to an accountant before the arrangement becomes a problem is a better use of your time than dealing with the consequences afterwards.
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Talk to Us Before You Make Assumptions
Getting employment status wrong is the kind of mistake that tends to surface at the worst possible moment, usually several years after the arrangement began and well after the invoices have been paid.
At Awesome Accountants, we’ll walk you through the actual working arrangements, explain what HMRC looks at and help you work out where you stand, in plain English and without the accountancy waffle. If you’ve got a contractor relationship you’re unsure about, or you’re questioning your own status, get in touch and let’s look at it properly.
