Employment Status for Tax
At McCabe Ford Williams, we have experienced and trained professionals who can advise on the ever-growing complex area of employment status. This will help you to manage your business and employees more effectively. Get this wrong and there are ramifications for both the individual and the employer as part of their duties in reporting to HMRC.
Key to note is that each person’s tax status can only be determined by applying the correct case law to the circumstances of each engagement. The fact that someone regards himself as being self-employed is irrelevant.
However, do not worry as our tax advisors are here to help.
What is employment status?
Employment status is the name given to determining if an individual is self-employed or employed. This is not only important under employment law, which governs an individual’s statutory rights and benefits, but also has vast implications in regards to making tax and National Insurance contributions (NICs).
In the simplest form, employees are paid salaries after the deduction of income tax and National Insurance under the Pay as you Earn (PAYE) system. Self-employed individuals, however, make payments direct to HMRC via the Self Assessment tax regime and face strict deadlines to submit their tax returns and pay any due tax. In addition, there are different rules on National Insurance contributions for employed or self-employed individuals and expenses are also treated differently as well.
The complications of employment status
Whilst the above sounds relatively simple in truth, this area of tax is complicated when you factor in the IR35 rules, which govern off-payroll working rules.
When do IR35 (off-payroll working) rules apply?
Since April 2017, all public sector employers (or an agency or third party that pays the individual’s company on behalf of the public sector body) have had to decide whether the contractors they engage should be treated as employees.
However, effective from April 2020 this will extend to the private sector but only for:
- medium to large companies with a turnover greater than £10.2m; and,
- with a balance sheet total greater than £5.1m: and,
- with an average number of employees greater than 50
It is essential to note, however, that sub-contractors who are engaged by medium to large companies meeting the above criteria will also be also be affected.
Providing services through an intermediary
The IR35 rules may apply if a worker provides their services through an intermediary.
An intermediary in this case is typically a worker’s own personal service company but can also be a partnership, a managed service company or, an individual.
The IR35 rules determine that workers who would be classed as an employee if they were providing their services direct to a client are treated for tax and National Insurance contributions in the same way as employees.
IR35 rules apply if you are:
- a worker providing services through your intermediary
- a client receiving services from a worker through their intermediary
- an agency which provides workers’ services through their intermediary
If IR35 rules apply tax and National Insurance contributions must be deducted from fees and paid to HMRC.
Employed and self-employed
Employment status gets even more complicated when the same person can be considered employed in one instance and self-employment in another. Whilst they may be doing exactly the same work their employment status will be governed by the individual’s working arrangements and taxed accordingly.
Key factors to consider when reviewing employment status
In recent cases the key factors in determining employment status have been:
- the ability to substitute (personal service was not required),
- lack of mutuality of obligation (the lack of an employer’s custom or obligation to provide work when none may exist); and,
- the employee’s obligation to perform or carry out work and be paid for it.
Other factors that have a bearing are:
- the control exercised by the engager which must amount to real interference in the way in which the work is done,
- financial risk,
- having the trappings of being in business on one’s own account,
- the freedom to undertake other work,
- provision of equipment,
- lack of employee type benefits and rights; and,
- the intention of the parties to have a self-employed contract for service
These are just some of the issues that affect employment.
Employment status warning to businesses
For businesses, the key point to note is that businesses who engage the services of a self-employed individual without considering their employment status could end up storing up large tax and National Insurance problems for themselves. Therefore, this is essential to get right.
With suitable contracts entered into between you as the engager, and the respective self-employed individual, and with evidence to support that working relationship, there should be no reason why self-employed status should not be achieved and maintained.
Likewise, if you have a personal service company you can protect its position and remove the prospect of IR35 applying by adopting the same careful measures.
HMRC Check Employment Status tool
HMRC has produced a ‘Check Employment Status for Tax’ (CEST) tool to assist with evaluating whether contractors fall within the new rules.
Please note that whilst meant as a useful aide, the tool does not always produce the correct answer. This is difficult to do due to the number of different potential scenarios and relying on the user answering the assessment questions correctly. On a positive note, however, the CEST tool can be helpful in understanding what matters HMRC consider in determining the employment status, although that is not as straightforward as we would like it to be.
How we can help
At McCabe Ford Williams, our experienced tax advisors can guide you through the employment status minefield. We can advise you in this complex area by:
- reviewing working arrangements; and,
- preparing or commenting on proposed contracts to evidence the working relationship
Book a free initial consultation with one of our tax accountants/tax advisors at your local MFW office.
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