Employment status - is someone employed or self-employed? This is one of the main areas of uncertainty in the UK tax system and for businesses one of the most expensive areas to get wrong in terms of higher labour costs, or more worryingly unexpected back tax liabilities.
Issues surrounding status affect all businesses, regardless of the sector they operate in because most businesses will engage self-employed workers. How such a worker is treated for tax purposes is of increasing importance to the taxman. A self employed worker costs less to engage than an employee. For this reason HMRC are particularly keen to tackle the status issue.
If HMRC deem that employment was appropriate rather than self employment, they will pursue both income tax and national insurance contributions from the engager. So how is employment status determined?
Unfortunately there is no statutory test although HMRC has published an Employment Status Indicator. However, over the years the courts have issued guidelines known as status tests. Although these are regularly challenged there remain three important facts - mutuality of obligation, control and substitution.
If either party is not obliged to provide or accept work then in simplistic terms there cannot be employment. If there is no control and the worker is able and does send a substitute then again, there cannot be employment. Features of employment will be the existence of various employment protection rights, such as a formal dismissal process, workplace health and safety protection, redundancy protection, paid holidays, sick pay.
A self employed worker will have no such protections and will be in business in their own right, have their own public liability insurance, provide their own equipment and transport and bear their own financial risk.
Whether an individual is employed or self employed, it is advisable to have contracts in place. For self-employed work a strong contract will help to defend a status enquiry from an HMRC status challenge.
The contract must however be backed up by real practice and acknowledged by both parties to be effective. This is therefore an important area that needs serious consideration and specialist advice.
For more information please contact our Employer Compliance Manager, Paul Chappell.
