Do You Pass the New Freelancer Test?

5 TIPS TO HELP PASS THE FREELANCER’S CONTROL (SDC) TEST

Working as an independent contractor (such as a freelancer or sub-contractor) can sometimes feel like a fine line between being an employee and being independent. That’s no reflection on the business that hires – it’s just that sometimes the lines can get blurred in the effort for both the business and the independent contractor to get the job done.

When it comes to paying tax or having employment rights (such as paid holidays) it makes sense to check the details. For example, get it wrong and the hirer could end up paying PAYE for the independent contractor or even having to provide paid holidays.

There is no single definitive test to determine whether someone is an employee or not (and whether PAYE must be paid). HMRC uses a series of tests, while employment tribunals use different tests. There are, however, some commonalities across both tests.

WHAT IS THE CONTROL/SDC TEST?

Whether you are an employee or independent contractor is likely to depend on 4 criteria:

– what work is being done

– when that work is being done

– where it is being done

– how it is being done

The control test is about the Supervision, Direction and Control (Hence SDC) elements of how the work is done – it’s about proving there is an absence of:

Supervision – having a supervisor to oversee that the work is being done and being done properly and who will help develop skills and knowledge.

Direction – making it clear how the work must be done in detail – providing guidance and instruction on all or most aspects of the work.

Control – dictating the how and the what relating to work done – for example, moving them from one job to another.
However, the HRMC has added a little twist to the test so you’ll be at risk if:

(1) You fail any one of the elements (supervision or direction or control)

(2) The hirer has SDC rights, even if they don’t use them

(3) Anybody, not just the hirer, has or exercises SDC rights

HOW CAN YOU PASS THE SDC TEST?

1          Have a written agreement

It may sound obvious, but a written agreement will set out the responsibilities and obligations of the hirer and adequately deal with the SDC issues – not having a written agreement, properly drafted by a specialist, adds to your risk because it’s impossible to produce a verbal agreement as evidence.

Of course, the written agreement needs to be followed through in practice – you can’t merely claim that an independent contractor is not subject to SDC while doing the very opposite in practice.

2          Substitution

You need a clause which will allow the independent contractor to provide a substitute to do the work. So, for example, if the independent contractor can’t do all or part of the work required, they must have the flexibility to supply someone who can. The clearer and more unfettered this clause is, the better; make it impossible to provide a substitute and you run a higher risk.

Ideally, also have some evidence of when such a substitution has occurred.

3          Freedom to choose a project  

Make sure that the independent contractor has a say about what projects they accept. Avoid situations where the independent contractor HAS to do something and instead ensure that they have a choice, without risk of penalty, about whether to accept a project or not.

4          Freedom about how to do the work

The hirer has to provide details of the job to be done and, of course, the expected outcome. What is important is that the independent contractor has discretion as to how it’s done, without anybody overseeing or directing exactly how to do the particular work.

5          How the independent contractor pays themselves

What often happens is that an independent contractor (let’s call her Jane) will set up their own small limited company (ABC Ltd) who will contract with the hirer. In return, the hirer should make payment to ABC Ltd. Where a direct payment is made to the contractor personally then the risk is much higher and most advisers, accountants and legal specialists will caution their clients against this.