One of the contentious issues surrounding the HM Revenue & Customs (HMRC)’s IR35 tax reform relates to the self-employment status. A lot of court cases today relate to the status of independent contractors. The confusion needs to be resolved to ensure that companies and contractors alike don’t face financial hardships and fewer cases end up in the court regarding the matter.
To solve the confusion regarding self-employed status, the Association of Independent Professionals and the Self-Employed (IPSE) has developed a ‘self-employment matrix’. The matrix is said to bring more clarity regarding what exactly constitutes self-employment. It will avoid what experts say is exploitation of independent contractors and also help them better understand how to present services on their own account.
In addition, the matrix developed by IPSE will help companies know the correct status of the contractors and avoid paying heavy fines to the exchequer.
The matrix developed by IPSE contains four categories.
Autonomy — It reflects the power self-employed/independent contractor has within the relationship. It assesses factors such as Mutuality of Obligation (MOO),exclusivity and right of substitution.
- Lack of Mutuality of Obligation (MoO) (10 points)
- Right to substitution (5 points)
- Use of a substitute (10 points)
- Lack of exclusivity (5 points)
Level of integration in client business — The category assesses whether the individuals represent the company such as by wearing a specific uniform or other means. Also, it assesses whether the employee uses own tools or equipment.
- Control of tasks (15)
- Control of method (10)
- Control of hours (5)
Business risk — This category assesses the level of business risk. Is the employee genuinely interested in the business? Is the employee paid on a project basis? Is the rate of pay fixed or negotiated regularly?
- Pay per job/task (10)
- Two or more clients (5)
- Entrepreneurial activity (5)
- Rate of pay (5)
Control of process and working environment — This is about how much control the individual who offers services as an independent contractor has over the work. It is assessed whether the individual has control over hours of work and type of tasks assigned.
- Representation (5)
- Equipment and tools (5)
Scoring and next steps
65+ = Self-employed
50-64 = Likely to be self-employed
35-49 = Unlikely to be self-employed
<36 = Not self-employed
Each factor in the category is weighted to reflect the importance of determining self-employment. Scores are added and the final score shows whether the contract represents genuine self-interest.
The most weighted categories include autonomy and control of the process as IPSE believes they are central to the self-employment status. The self- matrix will enable self-employed independent contractors to quickly know their status and whether they have to pay taxes. It will also help them know what terms of the contract need to be changed for the engagement to be considered as self-employment.
IPSE believes that the government needs to consider factors that constitute self-employment. It needs to bring greater clarity regarding what constitutes self-employment. The Self-Employment matrix can serve as a framework that will help achieve this purpose.