In the light of the Government’s consultation on employment status (ending 1 June 2018), the Taylor report issued last year and recent court cases, the issue of employment status is firmly on the agenda.
In this article, we revisit the issue of employment status, an area which will be of interest to all employers who engage individuals off-payroll e.g. agency workers, contractors, self-employed, individuals engaged via a personal service company.
What do we mean by employment status?
By employment status, we mean whether someone should be deemed an employee or employer for tax purposes and employment rights. That is, should an individual be on the payroll and subject to PAYE and NIC or can they be paid on a gross basis?
Why is it important?
Where an individual is engaged on a self-employed basis care needs to be taken to ensure that the individual’s employment status has been correctly determined with reference to the terms of the engagement and the nature of the duties.
If this is not identified correctly, employers may incur financial penalties for PAYE compliance failure, in addition to any underpaid tax and NIC. Since HMRC can look back four tax years for PAYE and six tax years for NIC, the amounts involved can be considerable.
Furthermore, getting the initial status assessment wrong could lead to significant financial consequences for employers and damage to the relationship with HM Revenue and Customs (“HMRC”).
What is the current position?
Individuals cannot choose whether they are to be classed as self-employed or as an employee.
The circumstances of an employees’ engagement will determine the status and unfortunately the burden of this decision initially lies with the employer or the contractor, and then for them to make the necessary tax deductions and/or NICs, as appropriate.
The tests are numerous, subjective and can include the following factors:
- control - who decides where the work is done
- mutuality of obligation - can the worker refuse the work
- financial risk
- integration - is the individual part and parcel of the organisation
- substitution/delegation - is there a right to substitution
- equipment - who provides equipment necessary to do the work
- is it a contract of or for services?
None of the above criteria listed can, in isolation, be taken as determining employment status. It is the overall picture, after taking all of them into consideration, which will determine whether a worker is employed or self-employed.
The current position can lead to an array of issues, including uncertainty, the risk of non-compliance for employers and those they engage to work for them, unexpected tax bills and time-consuming disputes. As a result, HMRC will now routinely challenge the status of any workers classified as self-employed during a compliance inspection.
What should employers do?
Employers should ensure that they have a fit for purpose process in place for determining the employment status of workers and should document their rationale for not including workers on the payroll.
It is not only self-employed sole traders that need to be considered. Other types of arrangement where employment status is likely to be important are set out below.
- Personal service companies (PSCs) - where a worker provides services through their personal service company and the end user makes payment direct to the personal service for the worker’s services
- PSCs working in the public sector
- Managed Service companies (MSC) - a MSC is a form of intermediary company through which workers provide their services to end clients. For a company to be considered an MSC please see the guidance here
- Intermediaries (agency workers) - where a worker is provided by an agency and is under the control supervision and direction of the hirer. Different rules apply where the intermediary is onshore or off-shore
The government commissioned an independent review of working practices, the Taylor Review which was published last year.
The Taylor Review proposed some significant changes to employment rights. It also proposed changes to the way in which an individual’s employment status is determined which may mean the introduction of a statutory test for employment status.
It is likely that there will be significant changes in this area and we would encourage employers to start planning now and especially those who rely on off payroll workers.
For more information, please contact partner Lee Hamilton
or employment tax manager Yadvinder Rihal.