Beatons Group has a policy of providing clients with timely and proactive guidance on the ways you can avoid later pitfalls, by being aware of relevant laws and regulations and knowing how to comply with them.
If your business involves staff who are temps, contractors, consultants or freelancers (whether you hire them yourself, or via an agency), you need to know the tax position and employment status of those individuals because it affects their rights to employment-related benefits and payments such as redundancy, holiday pay, sick pay, maternity pay, company pensions and bonuses.
Why is this relevant to your business?
If you’re making assumptions that someone is self-employed or employed by an outside contractor it could result in disagreements later, leading to possible legal cases and heavy payments to put things right. Businesses can easily get it wrong, but ignorance of the law is no defence where HM Revenue & Customs (HMRC) are concerned and it’s an area that they are focusing on. The number of PAYE tax investigations undertaken by HMRC has significantly increased in recent years.
If you are in an industry that involves temporary staff or consultants you can expect HMRC to look very carefully at your PAYE records and at how much is put through your accounts as consultancy expenses. We can guide you on this.
How can you tell who’s an employee and who’s not?
Often individuals and recruitment agencies will ask us whether, say as a result of a service contract, an individual might be treated as an employee for tax purposes. The short answer is “Everything depends on the tests below”.
- “Mutuality of obligation”: Do you always provide the work and can your staff member decline it if they wish? If you have to provide work and they can’t decline it, that indicates an employment status.
- “Right of substitution”: Does the worker have to carry out the work themselves? If they are ill or unavailable, could they send an equally qualified and skilled substitute? If they are not allowed to send a substitute it indicates an employment status.
- “Tools”: Does your staff member use their own tools or do they use the tools of your company? If you always provide the tools it indicates an employment status. If they always provide their own, it indicates self-employment.
- “Integration”: Does your worker illustrate to the outside world that they are an employee? E.g. Do they have their own listing on your company website alongside all your employees? Do they come to the team Christmas parties too?
- “Risks”. Can your staff member receive more money by undertaking the work more efficiently? For example, would they be paid more if they worked faster or served more customers? If they do not take any such “financial risks” then this indicates an employment status.
- “Instruction”: Is the worker able to deliver the service at their discretion or does your company direct how and when work must be carried out? A self-employed individual would have more autonomy over how they work.
HM Revenue & Customs will look at the responses to these tests and then assess whether the relationship is as an employee or as a self-employed contractor. But there are two other assessment questions which always over-rule those tests and can immediately classify you as being an employee:
- Does the worker carry out work for other companies/businesses and have they been an employee of the company in the past? HM Revenue & Customs will assume the person is an employee if they only work for one company and/or if they were previously treated as an employee at the company.
- Is the worker an office holder such as a Director, Company Secretary etc? Remuneration from an office holder is always treated as earnings from employment.
If you’re still not sure about employment status, what should you do?
Get in touch with Andrew Diver at Beatons Group. He has years of experience as a Tax Director and can advise you on how to be well prepared so you reduce the risks of any inadvertent error or challenge from HMRC.
The content of this newsletter is intended for general information purposes only. You should always seek appropriate professional advice before acting. No responsibility is taken for any loss as a result of any action taken or refrained from in consequence of the contents of this article.