Self-employment: What counts as self-employment for UC?
For UC purposes, self-employed earnings are income that the claimant derives from carrying on a trade, profession or vocation and which isn’t already classed as employed earnings.
According to the DWP ADM (Chapter H4), the concept of ‘trade, profession or vocation’ is taken from tax law. A person will either be a sole-trader or in a partnership with other(s).
The ADM includes a list of items that should be taken into account when determining if a person is engaged in a trade. These are based on the ‘badges of trade’ developed by the courts for tax law. No one point is exhaustive. In some circumstances the existence of one point may be enough in others it will be a combination of factors. We have reproduced the factors to be considered below. Paragraph H4013 contains useful examples of how the criteria will be applied:
- Whether there is a profit seeking motive (Regardless of whether or not a profit is actually made)
- The frequency and number of similar transactions. The more frequently that a transaction is carried out, the more likely that this is trading
- Whether assets are modified in order to make them more attractive for a person to buy. If this is the case then this is likely to point towards a trade.
- The nature of the asset – was the asset bought simply to sell on for a profit?
- Whether there is a connection with an existing trade. If a person sells something unconnected with what they normally do by way of work then this may point towards a person not trading
- Financial arrangements. Where an asset is bought with a short-term loan which is to be funded by selling the asset again then this points towards trading
- The length of ownership. The longer than an asset is owned, the more unlikely that the sale of it constitutes trading.
- The reason for the acquisition and sale.
The guidance also includes a list of factors to consider when assessing if a claimant’s earnings are self-employed earnings for the purposes of UC (as opposed to employed earnings). Those factors are:
- What form does remuneration take? Where tax is deducted at source, this may suggest that the employment is not self-employment
- Is the claimant’s work supervised? If they have control over agreeing to conduct work, fixing the price of work or how long the job may take this may point towards self-employment If the claimant has own control over their costs, this may point towards self-employment
- Does the claimant have the powers of appointment and dismissal and can they employ a substitute, for example to cover holidays or sickness? A power to appoint a substitute may point towards self-employment
- How long in duration are the contracts of work? Short contracts may point towards self-employment
- Does the claimant provide their own investment, for example, equipment. Provision of own equipment and tools may point towards self-employment
- Where does the claimant work? If they work from home, or a workshop or office they own or rent, this may point towards self-employment
- Is the person who engages the claimant for work obliged to provide work? If there is no obligation then this may point towards self-employment
- Does the claimant have discretion over the hours they work? The greater the discretion then it is more likely that the work is self-employment.
Guidance on what constitutes a profession and vocation is less detailed. Examples of a profession include accountancy, the law and consultancy. Examples of a vocation given in the ADM include sport, music and acting.
The profession and vocation must be carried out in a capacity other than an employed earner.
Where a UC claimant declares that they are self-employed to DWP, their work coach will send them a letter, UCD5, together with details of their gateway appointment.
The UCD5 is a letter sent to explain what the claimant needs to bring with them in their gateway interview. It includes information, which is also available on the GOV.UK website, around what expenses can and can't be claimed.
The DWP guidance (H4017) confirms that the DWP are not bound by a determination made by another Government department, which would include a decision by HMRC in relation to tax status. So even if a person is found to be self-employed for tax purposes, it does not follow that the earnings will be self-employed earnings for UC or that they will be found to be gainfully self-employed. Similarly, the decision on whether the earnings are derived from self-employment for UC purposes is not binding on any other government departments for other purposes.
Last reviewed/updated 2 August 2021