Employment status is the name given to determining if an individual is self-employed or employed and in relation to personal service companies, if the relationship between the engager and the service company is such that had an individual provided the services personally he would have been regarded as employed and thereby caught by what is known as the IR35 rules.
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.
The same person could be employed in one instance and self-employed in another doing the same work simply because the individual working arrangements are different. Regrettably, the Revenue’s factsheets ES/FS1 and ES/FS2 are very simplistic in their approach, are out of date with modern case law and somewhat misleading.
The key factors in recent cases have been the ability to send a substitute (personal service was not required) and the lack of mutuality of obligation (simplistically, 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 that work and be paid for it).
Other factors that have a bearing are the control exercised by the engager and this must amount to real interference in the way 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, not least, the intention of the parties to have a self-employed contract for service.
This is not an exhaustive list but just some of the things our advisers would look out for.
Businesses who engage the services of a self-employed individual without giving consideration to the question of status could be storing up large tax and National Insurance problems for themselves.
However, if the working arrangements are properly structured, a suitable contract entered into between the engager and the self-employed individual to evidence that working relationship and this is adhered to in practice, then there should be no reason why self-employed status should not be achieved or maintained.
Likewise, a personal service company can protect its position and remove the prospect of IR35 applying by adopting the same careful measures.
MFW have experienced professionals who are able to advise in this complex area by reviewing working arrangements and preparing or commenting on proposed contracts to evidence the working relationship.