Employment status · The test HMRC applies

Employed or self-employed? The test HMRC actually applies

Almost every conversation about hiring in the UK from abroad begins here, and a lot of them end here too. The label on the contract does not decide it. What the working arrangement actually looks like does.

Why this comes first

If the person is genuinely self-employed, there is no UK payroll to set up, no scheme to build and nothing to file. If they are an employee, there is, and the route depends on whether you have a UK entity. Getting this wrong does not produce a small error. It produces the wrong structure, applied for months, with arrears attached.

It is also the question people most want a quick answer to, which is exactly why it deserves a slow one.

The three that carry the most weight

Control. Who decides what is done, how it is done, when and where. A contractor is engaged to deliver an outcome. An employee is directed. If you set someone's hours, tell them which tools to use and expect them at a daily stand-up, the label on the agreement is not going to save you.

Substitution. Could they send a competent replacement in their place and would you accept one? A genuine right of substitution points hard towards self-employment. A clause that says they can, alongside an arrangement where everyone knows they cannot, points at nothing at all.

Mutuality of obligation. Are you obliged to offer work and are they obliged to accept it? A rolling expectation of continuous work, month after month, looks like employment however each month is invoiced.

The ones that decide close cases

Financial risk matters. Someone who can make a loss on a job, who fixes defects at their own cost and who provides their own equipment looks self-employed. Someone paid a fixed monthly amount whatever happens does not.

Integration matters too. If the person appears on the internal directory, manages your staff, has a company email address and is described to customers as part of the team, that is a picture of an employee.

And exclusivity matters. Working for one engager for years, with no other clients and no attempt to find any, is difficult to reconcile with running a business.

Two situations that catch overseas companies out

The first is the long-running contractor. Somebody was engaged for a three-month project in 2021 and is still there. Nothing was ever revisited. The arrangement drifted into employment while the paperwork stayed still.

The second is the person who incorporated at your suggestion. A limited company between you and the individual changes who you contract with. It does not, by itself, change what the working relationship is.

How to look at it honestly

Describe the arrangement to somebody who has never seen the contract. Say what the person does day to day, who tells them to do it, whether they could send somebody else, and what happens if there is no work next month. If your description sounds like a job, it is a job.

HMRC provide a check-employment-status tool, and it is worth running. Treat the result as evidence rather than a guarantee, particularly where the answers were finely balanced or where the arrangement later changes.

What happens if the answer is employed

Then the question becomes which route. An overseas company with no UK entity is usually looking at a direct payment scheme. A company with a UK subsidiary runs a normal PAYE scheme. An Employer of Record is a third option that removes the question by employing the person themselves.

None of those are difficult once status is settled. All of them are guesswork before it is.