Financial risk as a sign of self employment

Q: How does this look on two jobs?

Illustration only. Two joiners fit the same kitchen. Ali quotes a fixed £6,000, buys £2,400 of worktops and units himself, and must fix any defects at his own cost. If he finishes in 12 days he earns £3,600 for his labour, or £300 a day. If a worktop is cut wrongly and he spends £300 on a replacement and two unpaid days refitting it, he earns £3,300 over 14 days, about £236 a day. A bad job could leave him with a loss. That is genuine financial risk. Ben is paid £200 a day, the contractor supplies all materials, and if anything needs redoing he is paid his day rate for the extra time. Whatever happens, he cannot lose money on the job. Ben's position points towards employment unless other factors outweigh it.

Financial risk points towards self employment when the worker stands to make a loss on the engagement itself: by putting right poor work in their own time and at their own cost, by quoting a genuine fixed price, or by paying significant costs the client does not reimburse. HMRC’s Employment Status Manual at ESM0541 says the greater the risk, the stronger the pointer. But the risk has to be real and significant in relation to the contract, and its absence does not by itself make someone an employee.

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What does HMRC mean by financial risk?

ESM0541 describes individuals who risk their own money by buying assets, bearing running costs and paying for overheads and materials as likely to be self employed, and notes that employees do not usually need to risk their own capital. It also says investment as a shareholder is irrelevant, so owning the company you work through does not count.

The guidance on the Check Employment Status for Tax tool at ESM11085 adds the tests HMRC applies in practice. Financial risk is present where the worker bears the costs of fulfilling the engagement and could make a profit or a loss as a direct result of it. CEST looks at four types of cost: equipment, vehicles, materials and other costs. To count, a cost must be significant, judged against the value of the contract, and incurred because the contract requires it. HMRC disregards:

costs incurred out of personal preference
everyday items the worker has for both work and personal use
incidental and low value consumables
costs the hirer funds or reimburses

Why does putting right poor work count?

ESM0541 says that where a worker is required to correct substandard work in their own time without being paid again, that points to self employment, and the pointer is stronger if they must also pay for replacement materials. Its example is a bricklayer who has to rebuild a wall and pay for the bricks and mortar.

ESM11115 sets out the CEST answers, which grade the risk:

unpaid, with extra costs the client will not meet: the strongest sign
unpaid, with the only cost being lost time that could have been spent on other work
fixed in normal hours at the usual rate or for an extra fee: no significant risk
no, because the work was a one off or time specific event
no, because the worker is not required to put errors right

The answer must reflect what the contract requires and what would actually happen. A defects clause that the client never relies on, or work that is always corrected on paid time, does not create the risk the clause describes.

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How do fixed price quotes create risk?

ESM0547 explains that where a worker quotes a genuine fixed price, their profit or loss depends on their speed, efficiency and ability to control overheads and organise the work. Its example is a consultant agreeing a £20,000 fee to deliver a report within three months, possibly with penalty clauses.

ESM0542 links fixed price tendering to financial risk but warns that the price must be a genuine fixed price agreement for completing the work. It is not genuine if the engager sets or imposes the price for measured work, or if the price is no more than an agreed hourly rate. Payment by the hour or day is often inconclusive: many self employed people, such as plumbers and accountants, charge for time. ESM0542 also says payment entirely by commission, where the worker must meet their own expenses, involves real financial risk and is a strong pointer to self employment.

Which unrecovered expenses count?

HMRC’s CEST guidance gives worked examples for each category:

Equipment (ESM11090): a worker who must buy specialist equipment costing over £20,000, significant against the contract value, bears genuine risk. Equipment the hirer agrees to buy back at the end does not count, because the cost is reimbursed.
Vehicles (ESM11095): buying or modifying a vehicle specifically for the work counts if the hirer does not reimburse it. Using an existing car with mileage paid by the hirer does not.
Materials (ESM11100): materials costing about 40% of the income and forming a lasting part of the product count; materials at about 5% of income, or materials charged to the hirer up front, do not.
Other costs (ESM11105): essential premises, and significant travel and accommodation the hirer does not pay, can count. Professional membership and registration fees do not, because employees and the self employed both pay them.

Two further risks appear in HMRC’s guidance. ESM0541 accepts significant spending on training needed for an engagement as a pointer where there is a real risk it will not be recovered from future work. ESM0551 notes that a worker paid only after invoicing is exposed to delayed payment and bad debts in a way an employee is not.

How much weight does financial risk carry?

It is one factor in an overall picture. Cooke J included the degree of financial risk taken in his list of relevant considerations in Market Investigations, summarised at ESM7040, and the Hall v Lorimer approach at ESM7160 requires all the factors to be weighed together rather than counted.

ESM0541 is clear that the absence of financial risk does not always mean employment, citing session musicians held to be self employed despite having no business structure or capital at risk. It adds, though, that workers with neither financial risk nor a business organisation are unlikely to be self employed. Financial risk also overlaps with the wider question of whether the worker is in business on their own account.

How does this look on two jobs?

Illustration only. Two joiners fit the same kitchen.

Ali quotes a fixed £6,000, buys £2,400 of worktops and units himself, and must fix any defects at his own cost. If he finishes in 12 days he earns £3,600 for his labour, or £300 a day. If a worktop is cut wrongly and he spends £300 on a replacement and two unpaid days refitting it, he earns £3,300 over 14 days, about £236 a day. A bad job could leave him with a loss. That is genuine financial risk.

Ben is paid £200 a day, the contractor supplies all materials, and if anything needs redoing he is paid his day rate for the extra time. Whatever happens, he cannot lose money on the job. Ben’s position points towards employment unless other factors outweigh it.

What mistakes come up in status reviews?

Counting a laptop, phone or car that the worker would own anyway.
Counting costs the client reimburses directly, through a lump sum or by buying the item back.
Describing a day rate multiplied by an estimate of days as a fixed price.
Relying on a defects clause that has never been used and would not be in practice.
Treating shares in a personal service company as capital at risk.
Ignoring real evidence that does exist, such as bad debts written off, unpaid remedial work or invoices for materials.

In construction, the same factors decide whether a worker should be paid through PAYE or under the Construction Industry Scheme; see our guide to CIS or PAYE for construction workers. For how CEST records these answers, see HMRC’s CEST tool, and for the full set of tests see employed or self employed: the status tests.

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.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.