Self-employed or employed?

WILL OAKES of Attwells highlights potential pitfalls for businesses when determining whether an individual is employed or self-employed

WHEN setting up a business which contracts with individuals to provide services, one of the key considerations is to ascertain whether your relationship with those individuals is a contract for services which indicates self-employment or a contract of service which indicates an employment relationship.

Unfortunately, for many businesses this distinction only rears its head when either an individual brings a claim in the Employment Tribunal or when HM Revenue & Customs undertakes a compliance inspection.

A contract for service is best explained by its provision for a master/servant relationship, with the person being under the control of his employer. A contract for services is normally related to a specific task where the parties are on a more even footing.

However, the written contract in itself is not decisive. It will be evidence of the individual’s status but so will other factors in the relationship. Where HMRC sees that the contract does not reflect the reality it will be ignored in determining the relationship.

Some businesses still believe that a one-man company, interposed between the work provider and the individual and whereby income is taken by the individual in the form of dividends instead of earnings that would otherwise be liable to PAYE and NIC deductions, works as a means to achieving self-employed status.

However, the IR35 legislation and guidance brought in some years ago now determines that such arrangements do not work and will be challenged by HMRC on a compliance investigation.

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If a worker advises an employer that he is self-employed and that therefore he will take responsibility for his own tax arrangements, the proposal must be understood and, if necessary, challenged by the employer. The liability for the PAYE and NIC deductions rest with the employer and not with the employee despite any intentions to the contrary.

Tax indemnities that are sometimes offered by self-employed persons only offer value to the extent that such a person is worth potentially suing and/or the court action that could be necessary.

In determining a person’s status as an employee or self-employed a wide range of factors that need to be considered, including the extent the service is provided personally by the individual, the level of control exercised by the “employer”, the extent to which the individual is obliged to work and the “employer” is obliged to provide work, the level of financial risk assumed by the individual and the extent to which the individual provides his or her own tools.

A proper consideration of status and a professionally drafted contract could save a business thousands of pounds if it is faced with an HMRC investigation or a claim in the Employment Tribunal by a person previously believed to be self-employed.