Overview
It is often in a potential employer’s interests to get someone to work for them as a self-employed sub-contractor rather than as an employee. There is a financial saving because the employer does not need to pay Employers National Insurance Contributions on payments made to a self-employed person, and there is no need to pay the person when there is no work available for them to do. In addition, there is no need to consider holiday pay, sickness pay and other payments and benefits usually given to employees. There can be disadvantages too, for example because the person will not necessarily be available to carry out the work when the “employer” wants it done.
There are also benefits to the person who is treated as self-employed. Often the person can charge more for their work as this will still be cheaper for the “employer” than if they were paying an employee. Any tax due is paid later than it would be under PAYE as an employee, and some expenses can be claimed against the income which might not have been available as an employee. The person can seek jobs from other sources, and charge whatever they agree for the work they carry out. There are, however, disadvantages too: if the person is sick then they will not get paid; usually some public liability insurance is needed; books and records will have to be kept so that accounts and tax returns can be prepared, perhaps by paying an accountant.
In some industries it is common practice for people to be self-employed rather than employees. The main two areas are the construction industry and Information Technology.
How is Employment Status decided?
Unfortunately for both parties the decision as to whether a person is self-employed or an employee is not decided merely by both parties agreeing which they want. The detailed facts of the case will determine which status applies. There are several court decisions which help in deciding the employment status, but it is rare for a case to exactly match the conditions which applied in these judgements.
Although in theory the employment status depends on the terms of the contract between the two parties, HMRC will try to ignore the contract if they believe that in practice the relationship between the two parties is different from the terms of the contract.
HMRC tend to prefer people to be employees, because the tax and National Insurance Contributions are accounted for under the PAYE system. When HMRC carries out a tax investigation into a business they will often check to see if any people are paid as self-employed people rather than as employees; this is particularly true when they are carrying out PAYE investigations.
Deciding the employment status of an individual is a complex task. A number of factors need to be taken into consideration, and usually there is no one factor that decides the matter conclusively.
How can WLH Tax Help
Deciding whether someone you pay should be treated as an employee rather than a self-employed person is a complex task. The consequences of getting it wrong can be serious; if you have been paying someone as self-employed when you should have been treating them as an employee then you become liable for further tax and NIC. If this issue concerns several “employees” and has been continuing for several years then the sums involved can be substantial.
HMRC uses special “Status Inspectors” to argue their case. You will need someone on your side with the experience and knowledge to present counter-arguments where appropriate.
If HMRC are challenging your treatment of payments to self-employed people then WLH Tax can carry out a review of the circumstances to establish the employment status of the people involved.
If, as a result of our review, your tax affairs need to be discussed with HMRC, WLH Tax can negotiate on your behalf so that agreement can be reached as to the employment status of people you are paying.
If you want WLH Tax to review the employment status of individuals engaged by your business, either to establish whether you need to declare some incorrect treatment in the past by making a voluntary tax disclosure or because HMRC have already challenged the employment status of certain individuals, then please contact us for a free, confidential and no obligation discussion. We are happy to have an initial free of charge meeting with prospective clients.