Can the self employed choose their trading status?

Self Employed is just a label

Didn't find your answer?

The term Self Employment is just a label and is not defined in legislation.

Although it is used as a category by HMRC for tax purposes (sole trader), the term Self-Employment has a broader meaning in employment terms.

The label Self Employment means that you are not employed by another company or person and that you do not pay tax through the PAYE system.

The label Self Employed also means that you work for yourself and run your own business rather than be employed or controlled by some other business.

All Self-Employed persons or freelance contractors have the right to choose the structure of their own business. Any Self-Employed person may choose to be a sole trader, limited company, or partnership.

 

Replies (44)

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the sea otter
By memyself-eye
10th Oct 2023 17:04

and....

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paddle steamer
By DJKL
10th Oct 2023 17:24

If they are actually self employed vis a vis the particular engagement, so check the contract, check the relationship.

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Replying to DJKL:
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By fmuk
10th Oct 2023 17:53

Yes, someone actually working under a Self-employed contract, started up as a sole trader, and now has chosen to go limited.

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Replying to fmuk:
RLI
By lionofludesch
10th Oct 2023 18:11

fmuk wrote:

Yes, someone actually working under a Self-employed contract, started up as a sole trader, and now has chosen to go limited.

Nothing wrong with that. Though one of the snags is that he no longer has a contract. His company might like to seek one but there's no guarantee that his customer will agree.

On the other side of the coin, he may have engaged in contracts with suppliers which become onerous when he's no longer trading. HP contracts are an issue well debated on this forum. His company may not be entitled to the tax relief he was enjoying.

Incorporation is not a decision to be taken lightly.

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Replying to lionofludesch:
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By Tax Dragon
13th Oct 2023 06:45

lionofludesch wrote:

fmuk wrote:

Yes, someone actually working under a Self-employed contract, started up as a sole trader, and now has chosen to go limited.

Nothing wrong with that. Though one of the snags is that he no longer has a contract. His company might like to seek one but there's no guarantee that his customer will agree.

On the other side of the coin, he may have engaged in contracts with suppliers which become onerous when he's no longer trading. HP contracts are an issue well debated on this forum. His company may not be entitled to the tax relief he was enjoying.

Incorporation is not a decision to be taken lightly.

I would bring the OP's attention back to these wise words.

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RLI
By lionofludesch
10th Oct 2023 17:30

True to a point.

But, to be employed, you need to have an employer willing to employ you. To be self employed, you must follow it through by acting as a self employed person would.

IR35 and similar legislation aside, there's no problem trading through a limited company as opposed to a proper self employed fella.

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By SXGuy
10th Oct 2023 18:47

Amazed at how people can ask a question and answer it themselves in five paragraphs.

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By kaff
10th Oct 2023 19:24

Not defined in legislation, but there’s quite a lot of case law.

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By Ruddles
10th Oct 2023 23:03

I am still struggling to find a question anywhere

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Replying to Ruddles:
RLI
By lionofludesch
10th Oct 2023 23:38

Ruddles wrote:

I am still struggling to find a question anywhere

Is it just in front of the question mark near the top?

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Replying to lionofludesch:
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By Tax Dragon
11th Oct 2023 06:30

What does it mean?

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Replying to Tax Dragon:
RLI
By lionofludesch
11th Oct 2023 07:23

Tax Dragon wrote:

What does it mean?

Ah. Now that's a more difficult question.

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By David Ex
10th Oct 2023 23:08

fmuk wrote:

Any Self-Employed person may choose to be a sole trader, limited company, or partnership. 

Not sure any person singular can “be” a partnership.

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By penelope pitstop
11th Oct 2023 03:06

How many years did it take you to dream up this "mini-tutorial"?
It is rather earth-shaking stuff!
Even mind-expanding. Maybe.

But if I wish to apply your tax-nugget of wisdom to a real life scenario, can you please explain its application for my client base? They are always on the lookout for current pragmatic technical advice at the "coal face".

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By rmillaree
11th Oct 2023 08:50

The main issue is whether the facts suggest your choice is not acceptable by hmrc if you choose.

Eg if business employs freelance sole traders they have to do empolyment status check to see if its really false employment. So you may think you are sole trader ref money in payments out to similar hmrc may come alkong and say that should have been employment income.

Companies may have to treat income as paye salary of director if its IR35 or company paying you may do that on your behalf.

If you setup as sole trader and have non commercial losses hmrc may object to losses being used.

So whilst generally you can normally choose your trade type you have to be careful you are not falling foul of hmrc rules which could treat what you thought is trade income as something else (nomally employment income).

Obviously if you want to trade as limited company you need to to the trouble of actually setting one up before you commence !!

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Mark Lee headshot 2023
By Mark Lee
11th Oct 2023 11:41

A person who considers themselves self employed for some of their business activities can ALSO be an employee at other times.

Real life example:
I became self-employed in 2007 and have remained so as regards the income I generate from my speaking, writing, mentoring and webinar activities. BUT, for a few years I also had a part-time employed role where my income FROM THAT ROLE was taxed via the PAYE system. I simply excluded that income when reporting what I earned from my self-employed activities.

My EMPLOYED income would still have been subject to PAYE even if my other income was received via my own limited company invoicing my clients. The facts were such that I was EMPLOYED for that specific role. My status as a self-employed 'contractor' had no impact on my tax or employment status with the business that employed me.

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By fmuk
11th Oct 2023 13:48

I must be honest and say I used to believe that the term self-employment only meant a sole trader. Probably because HMRC labeled sole traders as self-employed and also as I trained as an accountant many years ago sole traders were always labeled as self-employed people.

More recently dealing with a particular case and reading through much case law, I now find that it has a broader meaning and was interested to hear from fellow accountants who may not have dealt with tribunal cases or read much case law if they thought self-employment means only a sole trader.

The most prominent case law I’ve seen was from the appeal court judge who sided with Lorraine Kelly after HMRC hit her with a £1.2 million pound tax bill. The appeal court judge concluded that Ms Kelly should be treated as self-employed while working as a PSC through her limited company.

ACAS and CIPD also both concur with various judges’ decisions that self-employment includes limited companies and partnerships (including LLP’s). The CIPD Self-Employed Contractors Guide is an interesting read.

Apologies if I appear to have answered my own question, these are just facts I’ve uncovered along the way.

Obviously, I agree that you must meet all the criteria for any trading status to first determine if it is employment or self-employment.

I also agree that you can be both Employed and Self-employed at the same time.

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Replying to fmuk:
DougScott
By Dougscott
11th Oct 2023 14:15

Surely a Limited Company is a "thing", a seperate legal entity to a person in law? So how can a limited company be "self-employed". The director of the Limited Company would however normally be EMPLOYED (on PAYE) by the company and therefore not self-employed (though often such one-man bands think they are self-employed!). Such directors do not pay tax in the same way as a self-employed person.

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Replying to fmuk:
paddle steamer
By DJKL
11th Oct 2023 15:42

I too always thought someone self employed required to be a human rather than A N Other type of legal person, does seem that the use of the term is drifting and acquiring further meaning.

(Perhaps we ought to revert and describe someone as being in trade or having a profession or a vocation)

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Replying to DJKL:
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By Tax Dragon
11th Oct 2023 15:59

DJKL wrote:

Perhaps we ought to revert and describe someone as being in trade or having a profession or a vocation

Tax law still does, and tax is levied accordingly. (It's even in the headings - eg ITTOIA, not ITSEOIA.)

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Replying to Tax Dragon:
paddle steamer
By DJKL
11th Oct 2023 17:40

Yes, but we (humans) do not use such in everyday speech, we say things like "My brother in law is self employed" when what we really ought to say is "my brother in law with his wife are directors/shareholders of their own private limited company and get rewarded for their efforts by a salary and by dividends"

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Replying to DJKL:
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By Bobbo
11th Oct 2023 17:51

In this circumstance i'd probably say "My [insert relation] run(s) their own business."

Avoids any indication of the nature of entity through which trade is carried out.

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By AdamJones82
11th Oct 2023 17:09

I'm missing what the actual question is here

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Replying to AdamJones82:
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By fmuk
11th Oct 2023 18:07

Can the self-employed choose their trading status?

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Replying to fmuk:
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By Tax Dragon
11th Oct 2023 19:39

No.

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Replying to fmuk:
RLI
By lionofludesch
11th Oct 2023 19:43

fmuk wrote:

Can the self-employed choose their trading status?

Yes. Up to a point. With certain caveats and provisos.

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Replying to lionofludesch:
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By Tax Dragon
11th Oct 2023 19:53

Yes but means no.

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Replying to Tax Dragon:
RLI
By lionofludesch
11th Oct 2023 20:12

Mmmm - but surely a fella can decide whether to be proper Case I, Schedule D type self employed or an employee of his own company?

It's a big question with a zillion scenarios to consider.

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Replying to lionofludesch:
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By Tax Dragon
11th Oct 2023 20:22

Let me put it another way: why does it matter?

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Replying to Tax Dragon:
RLI
By lionofludesch
11th Oct 2023 20:50

Only the OP knows.

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By fmuk
11th Oct 2023 19:20

This is what the Open University say about S/E:
https://help.open.ac.uk/self-employment

This is how ACAS view S/E:
https://www.acas.org.uk/employment-status/self-employment

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Replying to fmuk:
Stepurhan
By stepurhan
12th Oct 2023 10:18

The Open University is just an example of sloppy writing. Running a business through a company is not self-employment in most legal contexts.

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Replying to stepurhan:
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By fmuk
12th Oct 2023 12:18

Is ACAS also just sloppy writing, as HMRC advises asking ACAS if you are not sure who is Employed or Self-Employed?

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Replying to fmuk:
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By Tax Dragon
12th Oct 2023 13:13

"Self-employed status is not defined in employment law. It's a category used by HM Revenue and Customs (HMRC) for tax purposes."

It's not defined in tax law either. It's just a label that ACAS and others seem to be intent on rendering utterly meaningless (if it wasn't already).

What do you think it means, by the way? And why do you think it matters?

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Replying to Tax Dragon:
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By fmuk
13th Oct 2023 11:26

I’m in negotiation with ABC company on behalf of a client who now runs a PSC, trying to persuade them a PSC can also be classified as Self-Employment. We have comprehensively considered IR35 which does not apply.

ABC operates an organisation of self-employed individuals as agents.

The limited company name was added to the contract when the PSC started several years ago, and all has been fine until a new FD took over recently.

ABC is now informing client the company name was added as ‘the billing company’, and they should still be self-employed.

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Replying to fmuk:
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By Tax Dragon
13th Oct 2023 12:07

Tbh it's a legal matter. Make sure whatever services you are endeavouring to provide do not fall foul of LSA 2007 (see s12, perhaps particularly ss3(b)(i)).

You may have done all you can.

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Replying to Tax Dragon:
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By fmuk
13th Oct 2023 12:41

Thanks Tax Dragon and I hear where you’re coming from. But if a PSC is classified as Self-Employment there is no argument.

I’d be interested in your view on this:
https://www.patrickcannon.net/news/lorraine-kellys-victory-against-hmrc/

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Replying to fmuk:
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By Tax Dragon
13th Oct 2023 12:53

Clearly there is an argument. Else you wouldn't be where you are.

Imho the IR35 cases are irrelevant. You've already told us IR35 is not in point. What is relevant is the contract. I draw your attention yet again to Lion's wise words at 18:11 on 10 Oct.

(The contract is a legal matter.)

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Replying to Tax Dragon:
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By Tax Dragon
13th Oct 2023 13:07

But at least I now understand why you have asked the question. And I get your point.

But it's still about the contract.

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Replying to Tax Dragon:
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By fmuk
13th Oct 2023 13:22

Thanks Tax Dragon, appreciate all your comments. We don’t always receive coherent commentary on this site.

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By richard thomas
12th Oct 2023 18:02

Just to add to the fun, see s 11(1) SSCBA 1992 on Class 2 NICs:

"(1) This section applies if an earner is in employment as a self-employed earner in a tax year (the “relevant tax year”)."

and s 2(2):

"(b) “self-employed earner” means a person who is gainfully employed in Great Britain otherwise than in employed earner’s employment (whether or not he is also employed in such employment)."

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Replying to richard thomas:
RLI
By lionofludesch
12th Oct 2023 18:21

richard thomas wrote:

Just to add to the fun, see s 11(1) SSCBA 1992 on Class 2 NICs:

"(1) This section applies if an earner is in employment as a self-employed earner in a tax year (the “relevant tax year”)."

and s 2(2):

"(b) “self-employed earner” means a person who is gainfully employed in Great Britain otherwise than in employed earner’s employment (whether or not he is also employed in such employment)."

Does Northern Ireland have its own SSCBA?

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Replying to lionofludesch:
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By richard thomas
12th Oct 2023 20:57

Yes.

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Replying to richard thomas:
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By richard thomas
13th Oct 2023 07:02

The question from lion deserves a more comprehensive answer, especially in the light of the lengthy discussion of Class 4 in the post "Sole trader".

There are two relevant acts of 1992:

The Social Security Contributions and Benefits Act 1992 (c. 4) (GB Act)

The Social Security Contributions and Benefits (Northern Ireland) Act 1992 (c. 7) (NI Act).

Section 177(6) of the GB Act says:

“… this Act does not extend to Northern Ireland”

But opening words qualify that “Except as provided by this section, …”

Subsection (5) shows the exceptions:

(5)The following provisions extend to Northern Ireland—
section 16 and Schedule 2;
section 116(2); and
this section.

Section 173 of the NI Act says:

“(5) Except as provided by this section, this Act extends to Northern Ireland only.
(6) Section 116(2) and this section also extend to Great Britain.”

Section 16 and Schedule 2 of the GB Act are the computational provisions for Class 4. Section 16 makes its Kingdom-wide application clear:

“(1) All the provisions of the Income Tax Acts, including in particular—

shall, with the necessary modifications, apply in relation to Class 4 contributions under this Act and the Northern Ireland Contributions and Benefits Act. …

(3) Schedule 2 to this Act has effect for the application or modification, in relation to Class 4 contributions under this Act and the Northern Ireland Contributions and Benefits Act, of certain provisions of the Income Tax Acts, and the exclusion of other provisions, and generally with respect to the contributions.”

Section 16 of the NI Act is headed differently and does not contain the what is in section 16(1) and (3) of the GB Act.

Thus for Class 4 the position is that there are two charging provisions – section 15 of each Act and two sets of sections 17, 18 and 18A of each Act dealing with exceptions, recovery of Class 4 from earners also in Class 1 and certain partnerships. As to Schedule 2 to the GB Act, this is reproduced in the NI Act as Schedule 2.

Unfortunately on the legislation.gov.uk website the GB Act is regularly updated, I think initially by DWP Solicitors and now by National Archive, but the NI Act is lagging behind, with section 18A which was inserted by NICA 2014 (a UK wide Act) still not consolidated.

There are no differences of substance or style between the Acts in relation to Class 4, which is just as well as Class 4 is not really a social security contribution at all, but an additional tax on the “self-employed”, so has to be on a UK-wide basis, mut. mut..
Class 2 then is different because it is a contribution to benefit entitlement, unlike Class 4.

Fortunately sections 11 to 12 of each Act are identical, and the computational rules are in Class 4 anyway.

Class 4 is also subject to regulations mainly to do with exception, deferment (now abolished) and the interaction with Class 1.

These are in regulations 91 to 110 (Part 8) of the Social Security Regulations 2001 (SI 2001/1004). Regulation 156 says:

“Northern Ireland

156.—(1) … the provisions of these Regulations shall apply to Northern Ireland as they apply to Great Britain.

(3) In the application of these Regulations to Northern Ireland other than this regulation, a reference to a provision of an enactment, which applies only to Great Britain shall be construed so far as necessary as including a reference to the corresponding enactment applying in Northern Ireland.”

Hope this helps.

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