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HMRC internal manual

Employment Status Manual

HM Revenue & Customs
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Opinions on contracts: Case studies - example 3 - “Charlotte”

FactsCharlotte is an IT consultant who works through her own service company.

Job description/controlCharlotte’s client for this engagement is a software company. She has been engaged for her programming skills to work on a specific project as part of a team developing a new piece of software. She works to the client’s project manager who allocates particular sub programs to Charlotte that she writes. The client expects the project to last for around three months.

The manager specifies the way in which the sub-program is to be structured and can require changes to be made to make the work fit in with other parts of the program as it is developed, to rectify overall design faults, etc.

Charlotte works a set number of hours but actual working times are flexible in line with the company’s flexi-time arrangements for its employees. She is required to work at the client’s premises.

Payment basis/risk/sick pay/holiday payCharlotte is paid £3,600 every four weeks in return for working a 40-hour week. Extra payments are made at the equivalent hourly rate for any additional hours agreed.

Payment is made 14 days after the company has invoiced the client.

No sick pay or holiday pay is paid, under the contract Charlotte has with her company. She is paid an on-going, but much lower, salary which includes provision for holiday pay and sick pay.

Length of contract and personal factors

  • The contract is for 12 weeks - but there is provision for an extension if the project over-runs and all parties agree to the extension.
  • Charlotte does some work for another client at weekends and has worked for various clients in the past - always through her company and often through employment agencies. Her contracts have usually lasted for between one and three months. Most have been similar to this one but some have involved her in specific tasks for a fixed fee using her own equipment and working at home.
  • Charlotte has an office at home and a computer and other office equipment that is used for some of her other work. These contribute to her company’s business organisation - which she uses to obtain work, keep records, prepare invoices, etc.

Other factors

  • The company is contracted to supply Charlotte to do the work personally.
  • All equipment is supplied by the client.
  • The engagement cannot be terminated ‘early’ other than following a breach of contract.
  • There is no restriction imposed by the contract that prevents either Charlotte or her company providing services to others during the engagement.
  • All parties intended that the company/client engagement would be self- employment.

CommentsThere is an extensive right of control over Charlotte. The more important features are the client’s ability to shift Charlotte from task to task and to specify how the work should be done. In addition the client can control to some extent where and when the work is carried out. But control is not total. Charlotte is engaged to work on a specific project so cannot be told to work on something completely different - and she cannot be required to work elsewhere. Overall, this is a strong pointer to employment.

It is the arrangements between the service company and the client that are important here. The company is paid the equivalent of a salary - with overtime payments - but no sick pay or holiday pay. Although the invoicing arrangements result in a small financial risk this is minor. Overall there is no significant financial risk and no opportunity to profit from sound management of the task. This points to employment.

Charlotte and her company have a ‘business organisation’ - including an office and associated equipment based at Charlotte’s home. She has a variety of clients and all her contracts have been fairly short term. This is a strong pointer to self- employment.

The fact that Charlotte is personally contracted to do the work and equipment is supplied by the client both point to employment.

The fact that the contract cannot be terminated early is a neutral factor (no right to terminate is common in engagements of this length - whether employment or self- employment).

The fact that there is no restriction on Charlotte or his company providing her services to others during the engagement is a mild pointer towards self- employment.

Mutual intention for self-employment is relevant if the other factors are neutral.

Overall pictureThis is a borderline case. On balance, given all the facts, Charlotte would have been self-employed had she been engaged directly by the client. The new rules will not apply to the engagement.

The following point towards self-employment

  • existing business and a variety of different engagements, some of which would clearly count as self-employed if she had been engaged directly by her client.
  • overall business organisation (office and equipment at home, businesslike approach to obtaining engagements and carrying them out, etc). Charlotte would clearly be regarded as being ‘in business on her own account’ for those engagements where she carried out a specific task for a fixed fee using her own accommodation and equipment.
  • risk from invoicing.
  • the lack of an exclusivity clause.Other factors point to employment

  • There is fairly extensive control over Charlotte. The client can dictate ‘what’ work is carried out on the project and ‘how’ the work is done. But control is not total. Charlotte cannot be directed to work on another project or undertake some quite different work. Nor is there control in other areas (e.g. she is subject to the client’s normal staff rules/disciplinary procedures).
  • There is virtually no financial risk in the engagement and no opportunity to profit from sound management of the task.
  • Charlotte must carry out the work herself.
  • All equipment and accommodation is provided by the client.What can then have more significance is the extent to which the individual is dependent upon, or independent of, a particular paymaster for the financial exploitation of his or her talents (see Hall v Lorimer

ESM7160). The fact that Charlotte’s company is also engaged in contracts which involve carrying out a specific task for a fixed fee, using her own equipment, suggests that it is a genuine business and neither she nor her company rely on a single client for the exploitation of her talents. These factors balance the control and other employment factors that exist in this particular context and put the matter near the borderline where the mutual intention for self-employment becomes decisive.

However, the overall picture would have been rather different had the engagement been longer. For example, had the engagement been for twelve months the ‘personal factors’ would have been far less significant and the employment pointers would have predominated. Just because a person has an established business does not automatically make them self-employed for all engagements (see Fall v Hitchen (49TC433) ESM7055- also referred to in Hall v Lorimer). Also, if she had not also had contracts of a type which would clearly have fallen within the definition of self- employment, employment pointers would have dominated and the contract at issue would have been one of employment. The same could apply to shorter contracts.