Why are services by self-employed people and employees taxed differently in the UK?

Question

In the UK workers are taxed differently based on whether the work arrangement looks more like self-employment or employment.

Here's an example by HRMC for self-employment:

Alan is taken on by a manufacturing firm to design and build a new website. Alan and the firm have agreed a price for the job and when he will deliver the new website. Alan will mainly work at home, using his own equipment to complete the task. Alan is free to work for other clients but faces a contractual penalty if he doesn’t deliver the website on time, to the agreed standard. This represents a significant financial risk to Alan if he fails to deliver the final product as agreed.

And this for employment:

The manufacturing firm needs someone to maintain and update the new website. It hires Jemima to work for three days a week, eight hours each day. The firm provides Jemima with a laptop so she can work at its offices or at home with permission. She reports to the head of the IT department and must follow their style guide and format to update the website. The firm is responsible for providing and updating the software Jemima needs to do her work. If Jemima has to work longer than her contracted hours, she will be paid overtime. Jemima can work elsewhere on the days she is not working at the firm, with their agreement.

What is the argument for treating the two differently for tax purposes?

Answer 1

The government is using tax as an instrument for social design. The government want to promote "entrepreneurship", in the hope that it will grow the economy, create new jobs and new wealth.

To this end it taxes self-employment favourably (you are taxed on your profit, not your income, this allows you to set various business expenses against tax). This works well for many situations. For example, the employee who is required to use a computer has one provided in the office, they don't pay for the company computer. A self-employed person has to purchase their own computer. The company isn't taxed when it buys a computer, so why should the money that the company pays the self-employed person to buy a computer be taxed?

When this doesn't work is when companies use "self-employment" only to avoid tax or workplace rights. There have been a number of cases of people who are working as employees, but treated and taxed as "self-employed". It is the abuse of the self-employed status that the tax authorities want to prevent.

Answer 2

The difference I can see in those two examples is that in the self-employment example, Alan is getting paid for an entire website.

Regardless of how long it takes him to do it, as long as it's on time. This arrangement will end after a predictable amount of time.

Jemima is working 8x3 hours a week, and is getting paid for the amount of time spent working. It is unclear when this arrangement will end, as it is an ongoing role.

The UK government might also pay attention to if the tools you use in your work are supplied by the employer.