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This essay
is about distinguishing the difference between a self-employed and employed
taxpayer and the specific treatment for each type of individual taxpayer.

To determine
this classification an important consideration is the contract that describes
the working relationship. (Lymer and Oats 2016, p151) A contract is a legal
document that clearly status the relation between the person completing the
work and person or business paying for it, it should include three of
followings: intention to enter legal relations, an offer for acceptance and
consideration.  Basically, a contract of
services indicates the individual being an employee which will be taxed under
employment income rules. Alternatively, a contact for services represents a
person providing a service or product by himself or herself, a self-employed
taxpayer income will be treated by trading income rules. However, a brief
examination is insufficient to justify the difference if an individual has a
complicated case, further content of the contract or specific features of each
class needs to examine.

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The
classification of self-employed and employed can be very problematic, there are
a check list of factors to denote whether a person is employed or not. According
to Borough Council’s employment status document, it suggests a few main factors
that helps answer is question.
First, mutuality of obligation emphasise self-employed individual has the
freedom to accepts or reject work, there are no obligation to provide services.
On the other hand, employee is bound to offer work as the employer requested. Second,
right of control simply means who in in charged.  A sole trader has control of most aspects of
the task, he can decide the materials, location, cost and other factors. An
employee must follow the orders from their boss in most case, they don’t have
most of right to make adjustment to their work. Third, provision of own
equipment, for example a self-employed taxi driver has to get himself a car,
fuel and license on his own before making his run, where as a clothing factory
worker will be given the knitting machine, table and raw material.  Forth, Financial risk and ability to profit. Individuals
risk their own invested capital, for instance, buying the machineries for an ice
cream shop and bearing the running costs as well as paying for overheads and
stocks of ingredients; These are certainly self-employed, he will receive whatever
is left after deducting all the expenses. Employee are not expected to risk
their own money, they are paid by certain amount from the employee, receiving
benefits from National Living/ minimum wage as well as statutory holiday
entitlement. They are taken little risk in most cases. Sixth, part and parcel
of the organisation. In case, self-employed people are more of “a fixture” in which
his work is more repetitive but acquires no additional responsibilities. Alternatively,
employee has a chance of being promoted, possibly taking on more challenging
tasks: also belong to the works pension and Save As You Earn (SAYE) scheme. (Gov.UK
2018)

J. Freedman
(2001) suggested using a spectrum with each end representing employed and
self-employed to help distinguishing the difference. On the extreme
self-employed end, worker will be running a business on his own account as well
as bearing all the risk and reward to himself.  He would be independent and not involved in
any business or organisations of his clients, possibly a few employees working
for him. On the other end, employee will be receiving a wage or salary, under
supervision and integrated into a division or a department to which he is
supplying his services.

However,
there are extreme cases that cannot fit into either of description accurately. “In
practise, workers do not fall neatly within this binary classification but
cover a broad spectrum. (J. Freedman 2001) This is known as the grey zone;
these people consist a mixture of both characteristics from both ends of the
spectrum.

Consequences
of the employment income

Employment income
is taxable in the tax year in which it is received, most taxable employment
income is taxed under the Pay As You Earn (PAYE) system. (Gilberts, 2012) PAYE
is a system for collecting tax on employment income throughout the tax yeaar