Tax law does not define employment beyond saying it includes a contract of service, so status is decided by case law. The starting point is the three conditions in Ready Mixed Concrete: a wage for personal work, a sufficient right of control, and other terms consistent with employment. HMRC’s Employment Status Manual applies the same tests and then weighs every factor to form an overall picture.

Where does the legal test come from?

Section 4 of the Income Tax (Earnings and Pensions) Act 2003 says that employment includes in particular any employment under a contract of service, a contract of apprenticeship or in the service of the Crown. It does not say what a contract of service is. HMRC’s summary of the Court of Appeal decision in HMRC v Atholl House Productions Ltd records that, because the tax legislation gives no special meaning to an employee, the question is answered by applying the common law.

Employment law is different. GOV.UK points out that a person may have a different employment status in tax law from the one they have for employment rights, where there is also a middle category of worker. A tribunal finding that someone is a worker for holiday pay does not settle their tax position, and the reverse is also true.

What is the Ready Mixed Concrete test?

In Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497, MacKenna J said a contract of service exists if three conditions are met:

  1. the worker agrees, in return for a wage or other remuneration, to provide his own work and skill in performing some service for the other party;
  2. he agrees, expressly or impliedly, to be subject to the other’s control to a sufficient degree; and
  3. the other terms of the contract are consistent with its being a contract of service.

The case itself shows how the third stage works. The owner driver wore the company uniform and had to obey reasonable orders, yet he owned and maintained his lorry, paid its running costs and could, with consent, use a substitute driver whom he paid. MacKenna J held that he was a small business man running a business of his own, under a contract of carriage rather than of service.

What does mutuality of obligation mean?

HMRC’s guidance at ESM0543 treats mutuality of obligation as the question of whether a contract exists at all: the engager must be obliged to pay and the worker must be obliged to provide their own work or skill. While someone is working and being paid, that requirement is met. The Supreme Court in HMRC v Professional Game Match Officials Ltd [2024] UKSC 29 (PGMOL) described this as the wage work bargain and a precondition at the first stage of Ready Mixed Concrete. HMRC’s manual records that the Court endorsed these points:

  • a single engagement can be a contract of employment even if there is no overarching contract obliging either side to offer or accept further work;
  • a right for either party to cancel between accepting work and doing it does not remove mutuality at the first stage;
  • the nature and extent of mutual obligations can still be weighed in the overall evaluation.

How much control is enough?

ESM0518 stresses that it is the right of control, not its exercise, that counts. The question is whether there is a sufficient framework of control, citing Montgomery v Johnson Underwood and PGMOL. The right can be implied, and HMRC looks at control over what work is done, where, when and how (ESM0519). If there is no right of control at all, the contract cannot be one of service. High control is a strong pointer to employment but not conclusive on its own, as Ready Mixed Concrete showed.

Control exercised by an end client’s site manager is not automatically control by the engager: ESM0518 notes that the High Court in HMRC v Wright did not treat instructions from a site foreman as control by the employer, so HMRC asks what control the engager itself keeps.

Why does a right of substitution carry so much weight?

Personal service is essential to employment. ESM0530 says that if the worker is free to hire someone else to do the work, employment is unlikely, and that the right counts even if it is never used. The right must be genuine. An unlimited right for the engager to veto substitutes may mean the worker in reality has to do the work personally, while a right limited to suitably qualified substitutes may still be real. Ready Mixed Concrete itself accepted that a limited or occasional power of delegation may not be inconsistent with employment.

The weight given to a genuine clause depends on the facts. In MacFarlane v Glasgow City Council, coaches could only send someone from the council’s own register and the council paid the replacement, so the clause did not outweigh the pointers to employment (ESM0536). In Synaptek Ltd v Young the court said the clause was one fact among others and how far it was used in practice could be taken into account.

What other factors do courts and HMRC weigh?

ESM0515 lists the factors HMRC considers beyond control and personal service:

  • Equipment: provision by the engager points to employment, especially where it is fundamental to the service (ESM0540).
  • Financial risk: risking your own money on assets, overheads and materials, or putting right poor work in your own time and at your own cost, points to self employment (ESM0541).
  • Part and parcel of the organisation: once seen as an overall test, now only a pointer to employment (ESM0545).
  • Right to terminate on notice: indicative of employment but not conclusive (ESM0546).
  • Paid leave and benefits: contractual holiday pay or sick pay suggests employment, but rights that arise only under the Working Time Regulations are ignored (ESM0544).
  • Business on own account: the question posed by Cooke J in Market Investigations, which is less helpful for professions and vocations (ESM0514).
  • Personal factors and intention: how many clients the worker has and how they describe the relationship.

The method is not a checklist. In Hall v Lorimer, a freelance vision mixer who worked for around 20 production companies on mostly short engagements was held self employed. Mummery J, approved by the Court of Appeal, said the exercise is to paint a picture from the accumulation of detail and then stand back and make a qualitative appreciation of the whole.

Does the written contract decide the answer?

It is the starting point. ESM0510 tells HMRC officers to compare each written term with what happens in practice. A difference can mean the term was varied by agreement, the term is a sham, or the contract simply was not followed to the letter. In the first two cases, practice decides status; in the third, the written term stands.

Autoclenz Ltd v Belcher [2011] UKSC 41 allowed tribunals to look past written terms that did not reflect the true agreement. The Court of Appeal in Atholl House limited this for tax. HMRC’s summary records that the Autoclenz approach applies when testing an arrangement against a statutory definition such as worker in employment rights legislation, but not when deciding employment for tax, which is a common law question. For tax, the contract is interpreted against facts known or reasonably available to both parties when it was made. On the remitted hearing, the tribunal gave weight to an unequivocal statement in the agreements that the parties did not intend employment, alongside the presenter’s substantial work for others.

How does HMRC apply the tests in a compliance check?

In an employer compliance check HMRC gathers the original terms of the engagement (ESM0505), seeks explanations from both engager and worker (ESM0510), and asks for documents such as method statements, handbooks and procedures that may show control (ESM0518). It then weighs the factors in the round. HMRC also offers the Check Employment Status for Tax tool, which applies its reading of the same case law. Where a worker supplies services through their own company, the same tests are applied to a hypothetical direct contract under the off payroll working rules. Someone can also hold a job and run a business at once, as our guide to being employed and self employed at the same time explains.

Worked example

Illustration only. A small firm engages a bookkeeper for two days a week on a rolling basis. She uses the firm’s laptop and software, follows its month end procedures, cannot send anyone else and is paid an hourly rate with no risk of loss. She has no other clients. Each engagement is work for pay, so mutuality at the first stage is present. The firm has a right to direct how and when the work is done, so control is sufficient. At the third stage nothing points clearly away from employment: no financial risk, no own equipment, no substitution and no business of her own. HMRC would very likely treat her as an employee, whatever her invoices say. If instead she served ten clients from her own office, set her own methods and could send a qualified colleague whom she paid, the picture would point towards self employment.

What mistakes do engagers make?

  • Relying on a contract label or a substitution clause that is never realistic in practice.
  • Treating the absence of a duty to offer future work as proof of self employment, which PGMOL rejected for single engagements.
  • Counting factors instead of weighing them, contrary to Hall v Lorimer.
  • Assuming an employment tribunal decision on worker status settles the tax position.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.