Business Taxation: Comparing Employment and Self-Employment in the UK

This assignment provides a comprehensive analysis of business taxation, specifically focusing on the distinctions between employment and self-employment. It outlines the key criteria used to differentiate between the two, including the extent of control over the worker, right of substitution, obligations, financial risk, and rights and benefits. The paper also explores the preference of individuals for self-employment, particularly in light of IR35, a UK law designed to prevent tax evasion. The assignment details how IR35 impacts those operating as contractors through limited companies, and how individuals can structure their businesses to remain outside of the IR35 tax bracket by fulfilling specific obligations and understanding the factors determining their status. The assignment concludes by referencing relevant academic sources.

BUSINESS TAXATION

Table of Contents
Criteria to differ employment from self employment.................................................................2
Preference of people resorting to self employment.....................................................................3
REFERENCES................................................................................................................................4

Criteria to differ employment from self employment
Self-Employment refers to a person or group of persons starting a new business or company. It
starts with investment of capital which is either equally divided or invested in ratios as
partnership. The risks of the business are also then equally divided as per the partnership,
whereas employment refers to people being employed in an organization by an employer to
realize the organizational objectives. In turn they receive monetary compensation as staff
salaries. Looking at case law for guidance, the things which can differentiate employment from
self-employment are as follows:
Extent of control over worker: A self employed person is on his free will to come at his
business and execute the tasks as he pleases. The employed person would have to abide by
organisation rules.
Right of substitution: The self employed can bring in assistance by outsourcing or sub-
contracting. It would make work easier for the business owner however, same is not possible
with employed person who does not enjoys these rights (Hessels, Rietveld and van der Zwan,
2017).
Obligations: A client is not bound to give work and is not paid until he does so, however an
employee has to be available for work. Employee also gets the benefit of payment even if
employee is offered no work at times.
Financial risk: Self employed may incur financial loss for a job not accomplished well,
However, employee will not be very much affected as the salary will be paid to the employee. It
may just happen that during the loss occurred by the company, incentives may not get paid.
Rights and benefits: Employee gets the privilege of rights and benefits like bonuses,company
picnics or outings while a self-employed person cannot enjoy such rights as they have to run the
business and take decisions on their own.
Decision-making: An employee has to follow the decisions of their managers, they do not have
a free will to make decisions on their own. Self employed person can take decisions on own
which is beneficial for their business.
Contract: A contract by a self-employed person with other party has to be honoured and cannot
be breached; an employee however is in an open ended contract with a company and has to give
notice before leaving the company.

Preference of people resorting to self employment
People preference for self business has not decreased despite rising number of IR 35 cases. IR 35
is a UK law which avoids tax evasion where people can use the form of limited company
structure to pay less taxes. Despite being a contract with a limited company, the actual scenario
is of an employer employee relationship, where the worker is taxed like an employee. They are
also termed as deemed employees. IR 35 finds these deemed employees and taxing is done
correctly. However, the adverse impact of this happens when those operating genuinely are also
taxed. The UK government found out that people leaving employment roles in a company, to
establish their own limited company and then coming in contract with their previous employer to
benefit from the advantage of company set up (Haines, A., 2020).
People still are taking up self employment as there are two brackets made in IR 35. First
is inside IR 35 while the other is outside IR 35. The term outside IR 35 means that one is not
providing the same services to the client as in a job responsibility of a company before. The
worker is not to be entitled with the privileges an employee enjoys as it is own business. The
extent of control a client exercises over one's business also determines the bracket in which the
business falls. Other factors which determine being outside IR 35 is whether equipment provided
is by the owner itself, whether there is an ID badge of the owner and if they hold separate
business cards. If people can fulfil these obligations ,they can stay outside the tax bracket of IR
35, and are free to pay themselves in a tax efficient way through a mixture of salary and
dividends of their company. Although they have to make sure their personal and company taxes
are paid on time (Semenza and Mori, 2017).
Thus, people know that they have variety of options to set up their own kind of business
in which they can have free will, have flexibility of working hours as well as earn income
abiding by the law system. As it is, this form of business is also encouraged by the UK
government.

REFERENCES
Books and Journals
Hessels, J., Rietveld, C.A. and van der Zwan, P., 2017. Self-employment and work-related
stress: The mediating role of job control and job demand. Journal of Business
Venturing. 32(2). pp.178-196.
Haines, A., 2020. Businesses call on new UK Chancellor to delay IR35 and boost R&D tax
credits. International Tax Review.
Semenza, R. and Mori, A., 2017. WP3. Country case study: UK.