ESM11085 - Check Employment Status For Tax: Financial risk
Financial risk
CEST uses this series of questions to establish significant financial risk.
Where an individual incurs a significant financial risk, with a view to making a profit, this will suggest they are self-employed for tax purposes.
Financial risk is present where the worker bears the costs of fulfilling the engagement and could either make a profit or suffer a financial loss as a direct consequence of undertaking the engagement in question.
Financial Risk is one of several factors CEST considers when providing a determination. A low level, or absence, of financial risk does not mean a worker will be an employee. You can find more detailed guidance on financial risk at ESM0541
CEST addresses the level of financial risk by understanding the costs a worker might face in order to undertake the work and for which they will not be directly reimbursed. These are broken down into four broad categories;
- Equipment costs
- Vehicle costs
- Material costs
- Other costs
In HMRC’s view, for costs to be considered when assessing employment status they must be significant and incurred as a requirement of the contract. Whether costs are significant will depend upon the value of the contract. Costs a worker chooses to incur through personal preference are not relevant. Everyday items that a worker might have for both work and personal reasons are not indicative of financial risk. Incidental and low value consumables are not considered to indicate financial risk.
If the hirer provides you with funds for an expense, this is not financial risk.
A worker can also incur financial risk if they must put right faulty work. Having to do this in their own time and at their own expense is a pointer to self-employment. If a worker does this whilst still being paid, or suffers no financial consequences, it points more towards employment.