Sham self-employment in UK tax law and labour law refers to situations where individuals are classified or present themselves as self-employed when, in reality, their working conditions and relationship with their employer resemble those of an employee. This classification can be used by employers to avoid paying employer National Insurance contributions and to circumvent employment rights and protections that would otherwise apply to these individuals if they were recognised as employees.
The criteria distinguishing between genuine self-employment and employment involve several factors, including the degree of control the employer has over the worker, whether the worker is obliged to carry out the work personally, and the level of financial risk taken by the worker. For example, if the employer dictates how, when, and where the work is done, this suggests an employment relationship rather than self-employment.
The UK government and HM Revenue & Customs have been actively addressing sham self-employment due to its impact on workers’ rights and its potential for tax avoidance. IR35, also known as the off-payroll working rules, is one of the key legislations aimed at tackling disguised employment, where self-employed contractors work in similar conditions to employees but through an intermediary, such as their own limited company.
The distinction between being genuinely self-employed and being an employee is crucial for tax purposes, as it affects the way income is taxed and how National Insurance contributions are calculated. Misclassification can lead to legal challenges, penalties, and back payments of taxes and National Insurance contributions.
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