Employed or self employed?

extract from HMRC web site... (http://www.hmrc.gov.uk/ir35/)

Intermediaries Legislation (IR35) - Working through an intermediary, such as a Personal Service Company

Background

The Intermediaries legislation was introduced on 6th April 2000. It was first proposed by the Chancellor in the 1999 Budget and details were given in the Budget press release numbered IR35. Following extensive consultation, revised proposals were announced in a new press release dated 23 September 1999. However, the legislation is now commonly referred to as 'IR35'.

The aim of the legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or partnerships, in circumstances where an individual worker would otherwise -

For tax purposes, be regarded as an employee of the client; and
For NICs purposes, be regarded as employed in employed earner's employment by the client.

Prior to the introduction of the legislation, an individual could avoid being taxed as an employee on payments for services and paying Class 1 NIC by providing those services through an intermediary. The worker could take the money out of the intermediary, normally a Personal Service Company, in the form of dividends instead of salary. As dividends are not liable to NICs, the use of a dividend remuneration strategy results in the worker paying less in NICs than either a conventional employee or a self-employed person. And PAYE would not apply to the dividends.

The legislation ensures that, if the relationship between the worker and the client would have been one of employment had it not been for an intermediary the worker pays broadly tax and NICs on a basis which is fair in relation to what an employee of the client would pay.

On 6 April 2007 Chapter 9 ITEPA 2003, more commonly known as the Managed Service Company ('MSC') Legislation, was introduced. The MSC Legislation applies to individuals providing their services through intermediaries which meet the definition of a Managed Service Company.

An intermediary must consider whether the MSC Legislation applies before considering IR35. Intermediaries that do not meet the definition of an MSC must continue to consider IR35.

The interactive Employment Status Indicator (ESI) tool, available to both employers and workers to check that their employment status for tax and NICs is correct, has been updated and improved.

Employers may rely on the results indicated by the ESI tool if both

the answers given to the ESI questions accurately reflect the terms and conditions under which workers provide their services
AND
the ESI has been completed by the employer or agent, but not by a worker.

If copies of the results are printed or saved, HMRC will be bound by the outcome if the worker's employment status is ever questioned and copies of the copies can be produced.

Further information click here : Employment Status Indicator

see also...
Intermediaries Legislation (IR35) Business entity tests - Example scenarios
This is an HMRC pdf booklet.