The biggest tax error small businesses make; and how to avoid it

Posted 2015 by admin

If only I had a £ for every time I have heard this – “Hi Chris, I have taken someone on, on a self-employed basis, but it’s OK because he gives me an invoice”. At this point my heart usually sinks.

It is fairly well know that the self-employed pay less tax than those in employment. The individual Worker can offset genuine business expenses against their income and the Engager can avoid costly Employers NIC as as well as related holiday and redundancy costs etc. So there is naturally a temptation to prefer self-employment to both parties.

Sadly, preference has very little to do with it. Over the years the Courts have had many chances to look at the relationship between the Engager and the Worker to determine what makes a person self-employed or employed.

There is no standard checklist and each situation will be decided on its own facts, but an answer of “Yes” to the following questions will point towards self-employment  status and an answer of “No” towards employed status:

  • Does the worker taking any financial risk?
  • Can the worker benefit from sound management of the business?
  • Does the worker work for anybody else?
  • Can the worker send a substitute?
  • Does the worker provide his own tools etc?
  • To an outsider does the worker appear to be independent of the organisation?
  • Is there a lack of mutuality of obligation? ie can the engager decline to offer work and the worker decline to accept work?
  • Does the engager have the right of control over the worker in the way in which he performs the work?

You will note that not on the list is “Does he give you an invoice”?


Regrettably, when I ask small business owners these questions I often receive a long list of “No’s” and I immediately inform them that the current practice must stop immediately. Either the Worker must come under PAYE or the arrangement is restructured so that the Worker can genuinely be treated as self-employed. This is not impossible but does need expert guidance.

HMRC PAYE inspectors must regard this as a little goldmine as it so simple to disprove Self-employed status and will gross up the payments made to the Worker and expect to be paid the PAYE that the Engager did not deduct along with Employers’ NIC plus penalties and interest. They can go back several years. The total figure can easily run into £000’s, tens of £000’s or even hundreds of £0000’s for even a relatively small business.

If you are engaging self-employed persons and you answer “No” to any of the questions above then I would recommend that you take advice from a firm of accountants such as ourselves who specialises in Status issues as soon as possible.

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