UHY Ross Brooke Chartered Accountants

Employment vs Self-employment?

IR35 self employed or employed

Newbury accountantFrom a tax perspective, the financial attractions of self-employment over employment are fairly obvious. No employers NIC, workplace pension contributions or holiday/sick pay to worry about for the engager, reduced employees NIC for the worker and the worker can offset expenses against his income. Everyone’s a winner right?

By Chris Davies

Well frankly no. Employment status is a question of fact not a question of choice and over many years the Courts have heard many cases have come before them on this subject.

So how does one know if they are employed or self-employed for tax purposes?

The courts have determined that a number of factors need to be taken into account and no one factor is determining. One might view it as considering each of the terms of the engagement, painting a picture and then standing back and looking at the picture as a whole.

But some factors that might be taken into account are:

  • The engager’s right of control over the worker. Can the engager tell the worker what to do, how to do it, when to do it?
  • Is the worker required to provide personal service or can they send a substitute?
  • Is there any mutuality of obligation to offer work and accept work?
  • What financial risk does the worker take in the business?
  • Can the worker make a loss?
  • Does the worker receive any benefits, holiday pay, sick pay etc
  • Can the worker be seen to be in business on their own account or are they seen as part and parcel of the organisation?
  • Does the worker meet his own expenses, employ staff etc?
  • What was the intention of the respective parties?

NB the above list is not exhaustive

So what happens if you get it wrong?

If a worker is paid as self-employed and it is later found that the worker should have been paid as an employee then HMRC will seek to recover the PAYE tax and NIC that should have been paid over at the time. Worse still they will regard the payment made to the worker as the net payment so will want the PAYE tax and NIC on the grossed up amount!

On top of that, they will most likely add interest and penalties and where the situation has occurred for a number of years, seek to recover the tax, NIC and penalties for a number of years. The resulting figure can put a successful operation out of business and the business owner may lose all his assets as a result. This is not a situation that any business owner wants to find themselves in.

What if the worker uses a limited company?

The basic concept is the same but the liability for unpaid tax and NI may shift.

It is the responsibility of all large and medium sized companies to determine the employment status of workers engaged through a Personal Service Company, again considering the factors listed above. If the engagement is caught by the Off-payroll legislation (IR35) then the payer (which may be an agency is some cases) must account for the PAYE and NIC on the payment.

Small companies that engage PSC’s do not have to make the determination. In such cases it is down to the PSC to determine whether IR35 applies and account to HMRC for the PAYE tax and NIC.

A business will be small if it satisfies two or more of the following requirements:

  • It has an annual turnover not exceeding £10.2m
  • It has a balance sheet total not more than £5.1m
  • It had an average of no more than 50 employees for the company’s financial year.

In all cases where a decision needs to be made about employment status, both engagers and workers can use the HMRC CEST tool.

The tool will ask questions about the contract and as long as the answers are answered honestly HMRC will accept the answer and that the engager or PSC has acted on good faith. Obviously the results should be printed off and retained.

If you would like any assistance with contract reviews or employment status questions, please do get in touch.

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