CS writes: I am consulting for a single client. I operate as a sole trader, but other sole contractors on the project operate through their own companies. We are all aware that our employment status could be challenged by the taxman. What would the impact be on me as a sole trader?

A challenge to your self-employed status could come through either a review of the client’s pay as you earn (PAYE) records or an inquiry into your own tax return, writes Jon Sutcliffe, partner at Kingston Smith LLP.

It is more likely to arise through an inspection of the client’s records, which might prompt HM Revenue & Customs (HMRC) to argue that PAYE and national insurance contributions (Nics) should have been deducted because your true status was that of an employee. Whether you are deemed to have been employed or self-employed will depend on the particular facts — and on negotiations with HMRC.

If you should have been treated as an employee, then HMRC would normally look to the employer to pay any PAYE tax and Nics that should have been accounted for. There would also be interest and possibly penalties chargeable.

While HMRC will often not seek to claim any additional tax from the individual in these circumstances, you may find that you have an indemnity clause in your contract which could allow your client to recover the tax, Nics, interest, penalties or other costs it suffers.

If any query arose on your own tax return, and it turns out you should have been taxed as an employee, you will probably pay more because you will not be able to make deductions for expenses.