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All the installments of Determining Employment Status are here:

Determining Employment Status Part 1 "The Right of Control"
Determining Employment Status Part 2 "Financial Risk and Reward"
Determining Employment Status Part 3 "Mutuality of Obligation"
Determining Employment Status Part 4 "Substitution"

Financial Risk and Reward

Today in the second of my posts on the four key factors that determine your employment status I will be talking about Financial Risk.

As you'll see the ongoing theme in all these posts is independence. If you're independent, chances are you would be classed as self employed. The battle you face is establishing this independence in the eyes of HMRC.

Starting your own business can be an expensive process, and while that can be a pain, it is these costs that begin to support the argument that you are an independent contractor. If the person or company you accepted work from is supplying your tools, or if you are working under their Public Liability Insurance, I don't think HMRC could be blamed for being suspicious. Supplying your own tools and Public Liability insurance on the other hand both point firmly towards self employment as it's clear you are bearing the risk yourself and are therefore more in control of the way you work.

A key point of the idea of risk and reward is that of making a faulty job right. If you've paid someone to do a job, or done a job yourself that isn't up to the agreed specifications, making it right out of your own pocket is the risk you've taken as part of running a business and points towards a status of being self employed. The same goes for completing a job ahead of schedule, if you've agreed a price in a contract and completed the job to specifications in half the time, welcome to the reward part of self employment, you have probably made a handsome profit and you can pack up and move on to your next job, congratulations.

Risk and reward could equally be called loss and profit and if you're self employed there should be a chance of either on each contract you take (regardless of how good a negotiator you are). If you're an employee you are paid a regular amount, be it by the hour, day, week or month; if you work your hours or any overtime you'll get paid, this isn't profit, this is simply the wages you are due and that your contract dictates.

In an ideal world it would be this cut and dried, but due to this being reality that's sometimes not the case. With some contracts, equipment may be supplied, or training may be supplied. This doesn't mean you are automatically an employee, but you must be able to prove your independence through other means, that's where mutuality of obligation comes in, and I'll be covering that next Friday.

I hope that's made the world determining your employment status less murky, if you want to look over the complete list you can find it here.

Hugo
21/11/2008