There is no rigid definition in UK law over what exactly makes someone employed or self-employed. However, a number of precedents exist to help you determine what your employment status is. For example, if you work for a company but you use your own tools and hire staff at your own expense to help with the work, you would probably be classed as self-employed. However, the only way that your employment status can be fully determined is by an Employment Tribunal judge.
If you don’t provide your own tools or hire additional help, but you receive certain benefits from the company, such as a pension or a company car, you would likely be considered an employee.
Do note that your employment status is not entirely governed by how it is perceived by you and your employer. If your employment relationship is that of someone who is self-employed, it is likely to be regarded that way by law, even if you and your employer consider you to be an employee.
Working as a sole trader
A sole trader is someone who runs a business they are the sole owner of, for example, if you are running a shop or restaurant.
If you are a sole trader, you can work alone or you can hire people to work for you, depending on your resources and what is most appropriate for your business.
If you are running a limited company, the business itself is a distinct legal entity. This is not the case if you are a sole trader.
Working as a sole trader means you get to keep all of the proceeds of your business but it also gives you what is known as unlimited liability, meaning that any debts the business accrues will be entirely your responsibility.
Setting up as a sole trader is much simpler than starting a limited company. All you need to do is register your business name with Companies House and you can start trading.
You will need to keep accurate financial records for your business in order to satisfy HMRC requirements. These will vary depending on your line of work, but any business or sole trader must keep records of all sales, purchases, expenses and earnings.
You will most likely need to keep other records, depending on the type and scale of your business, for example, if you run a shop, you will need to keep records of everything which goes through the till, as well as an inventory of your stock. If you have employees, you will also need to keep payroll records.
Bear in mind that the more detailed your records are, the more likely they are to satisfy HMRC you are complying with the law.
Taxes for the self-employed
If you are self-employed, you will need to pay income tax and National Insurance on any profits you make. To do this, you will need to register for a self-assessment with HMRC.
If you have employees, you may also need to register for PAYE. PAYE returns must be sent to HMRC every time you pay your employees, detailing each employee’s wage, tax, and other deductions.
There are a number of different criteria which can make your employees eligible for PAYE, for example, if they have another job, receive a pension, or if you are paying them above the PAYE threshold. HMRC has more guidance on registering for PAYE on their website.
The new General Data Protection Regulations (GDPR) came into effect in May 2018. These regulations govern how businesses collect, store and handle an individual’s data, and determine the penalties for those who fail to comply. Any business that holds personal information about an individual/customer whether electronic or paper, will need to ensure that they can prove that they have obtained consent to hold/use that data.
Unlike large businesses, sole traders and the self- employed don’t need to appoint a Data Protection Officer. However, they could be fined up to 4% of their annual turnover for failing to get sufficient consent to collect, hold and use a person’s data.
They will have to get clear and unambiguous consent; have to keep a secure record of how and when that consent was granted, what it was granted for and for how long it will be held. Consent must be positively given so the use of tick boxes to presume that consent has been given, unless an individual opts out will no longer be an appropriate means of proving consent to hold/use data has been given. Under the regulations, customers will have the right to withdraw consent that was given and the right to be ‘forgotten’ and for their data to be deleted.
Useful guidance on the new regulations has been published by the Information Commissioners Office and can be found on their website at ico.org.uk.
You may need some sort of insurance if you are working on a self-employed basis. In some cases this will be a legal requirement.
The type of insurance you need depends on your line of work. Here are a few common examples.
Car or vehicle insurance
If you need to drive your vehicle for your businesses, you will need to make sure it is insured for business use. You can do this by checking with your insurer.
Public Liability Insurance
This protects you if a member of the public comes to harm or has their property damaged due to something careless you or one of your employees has done, for example, if someone trips and injures themselves in the premises of your business. This is particularly important if you run a shop or another sort of business that has customers or other members of the public.
Public liability insurance often comes with product liability insurance included. This works similarly, except that it covers you if someone sustains harm or property damage from a product your business has created. This is particularly important for those working in the food industry, making toys or other things intended for children, or anything which could easily cause harm if it malfunctioned.
Please note the public liability insurance does not cover your employees. For this you will need employers’ liability insurance.
Employers’ Liability Insurance
This insurance will give you cover to continue paying employees who are injured working for you. It only applies to injuries sustained on the job, for example, if they tripped and fell in your workplace. This insurance is mandatory for any business with employees.
Professional Indemnity Insurance
This cover protects you if you are sued by a client over specific technical services you have rendered to them. This sort of insurance is important if the consequences of a mistake by you could be particularly damaging and costly, for example, accountants are legally required to have professional indemnity insurance. Other professions which benefit from professional indemnity insurance include solicitors, doctors and architects.
Even if your line of work does not legally require this insurance, it can be of great benefit to you, even if you never need to claim under it, as you may find business partners will be unwilling to work with you without any indemnity insurance.
Professional indemnity insurance can protect you if you are sued for reasons other than financial loss, for example, if you are a hairdresser you could be sued for giving a customer a hair style that did not meet their approval on their wedding day.
For more specific advice on whether you should get professional indemnity insurance, you should talk to your trade association or regulator for your profession.
Building and Contents Insurance
This will cover you if something happens to damage the premises and contents of your work such as a fire or flood. If you work from home and already have this insurance to protect your home, you should check to see if it will cover you for business use of the same premises. Most home insurance will only cover you for residential purposes.
Business interruption insurance could also protect you if a major incident has caused extensive damage to your building. This insurance will help you cover expenses and lost revenue if you are forced to stop trading temporarily by a major incident.
Business Assets and Equipment Cover
This will cover you if any equipment or assets that you use for your business are stolen or damaged (excluding normal wear and tear).
This covers you if any goods you have sent are lost or damaged. This is particularly important if you are running an online shop and need to post your products to your customers.
This will generally only cover you for things being sent domestically. International shipping will require separate insurance.
Health and Safety
You will need to make sure your working premises are compliant with health and safety standards, particularly if you have employees working there or you have clients and customers who enter the premises.