• Given the significant, and rising, levels of employers’ national insurance, there is a natural tendency to wish to treat workers as self-employed.
• However, HMRC is paying increasing attention to this area, which it has found to be lucrative as a source of revenue.
The risks of getting it wrong
• If HMRC successfully re-categorises a self-employed worker as an employee, it can go back up to 6 years to claim PAYE & national insurance from the employer. And it is under no obligation to offset the amounts of tax and NI paid by the worker against that liability. Often the amounts involved, with interest and penalties, can bankrupt a business.
Contract for services
• So there is a powerful incentive to get it right.
• Given that HMRC’s approach is to start by examining the contract between the parties, we need a written contract, which says what we want it to say whilst being consistent with the facts of the working relationship. This is a contract for services, as opposed to a contract of service, which is a contract of employment.
• If you harbour a desire to be a self-employed company director, forget it. A director an officer of the company, and officers are taxable as employees.
• In passing, don’t forget that as an officer you are only subject to minimum wage legislation if you have a service contract with the company. Thus (as is often the case) if it is better for you to take a sub-minimum wage salary from your company, don’t have a service contract.
The contract as fact, not fiction
• Although HMRC start any review with the contract, it will only determine the matter if it reflects what happens in practice. If it is inconsistent with the true working relationship, they will look at the underlying facts. So make sure that what happens in practice is faithful to the terms of the contract.
Factors impacting on employment status
• There are three main factors impacting on employment status. In, arguably, reverse order of importance, these are:
o Mutual obligations
o Personal service
• We will look at each in turn
• An employment relationship implies control by the employer over the employee, whilst a self-employed relationship does not. One would expect a much greater degree of latitude for a self-employed person to determine how they undertake their contractual obligations than would be the case for an employee.
• Typically a self-employed person might be engaged to undertake a particular project, to which they bring skills not present within the workforce of the organisation engaging them. That being the case, much would typically be left to that person’s discretion in determining how to carry out the project, which would be indicative of self-employment.
• Employment tribunals have determined that, in order for an employment to exist, there must be obligations for the employer to provide work and for the employee to accept it.
• Whilst the contract will undoubtedly say that this is not the case, this is an area where particular care is required to ensure that the contract is consistent with the facts.
• It is all too easy over time for the parties to slip into a habit of assuming that work will be provided and undertaken, thus potentially turning the relationship into an employment. One approach to this problem is to have separate contracts for separate projects, so that there is a clear break in the relationship when a project ends.
Problems with control and mutual obligations
• Not all self-employed relationships take the form of a series of clearly-defined projects, however, and thus the risk of mutual obligations developing, or of the control issue being a problem, is very real in many cases.
• It is in such cases that personal service can become the decisive factor in establishing self-employed status.
• Employment tribunals have found that the requirement for personal service is a prerequisite for an employment to exist. If the worker is not required to carry out the services himself, but can instead provide and pay a substitute, he cannot be an employee.
• Thus in appropriate cases a substitution clause along the above lines will be sufficient to determine the status issue in favour of self-employment.
• Of course the contract will stipulate that any substitute must be appropriately qualified, experienced etc. to fulfil the terms of the contract.
• Equally, it is likely that the last thing the worker wishes to do is to provide a substitute who the engager may prefer and engage for future assignments. Thus the situation may never arise in practice. It is helpful if it does, but not essential in our experience.
• From the engager’s point of view, the contractual situation is greatly simplified if the worker operates through a service company.
• The first reason for this is that the risk of wrong categorisation transfers to the company, although this is in practice something of a red herring.
• The more important reason is that the company can contract to supply the services of an unnamed person of suitable skills etc to undertake the contract. Thus there is clearly no requirement for personal service by any individual.
Summary & Conclusion
• Thus, if the services of a specific individual are not crucial to the engager, an appropriately worded contract for services will secure self-employed status.
• If they are, consider asking the worker to operate through a service company to resolve the issue.
• If this is not possible, and you require that individual’s services, accept that they are an employee!
• So if you are interested in legitimately treating people working for you as self-employed, please contact Mark Simpson to discuss whether this is possible in your circumstances:
• Telephone 0161 886 8062
• E-mail email@example.com