Employed or self-employed? That is the question

Published: Friday 12 April 2019

The question may not be as old as Shakespeare (or indeed ever posed by him), but it is one that businesses have been agonising over for many years.

Where a new worker is taken on, it is the firm’s responsibility to assess whether they are an employee or genuinely self-employed. Incorrectly treating an individual as self-employed can be very expensive, as HMRC can seek to collect the PAYE tax and national insurance from the firm possibly going back a number of years. 

Where the nature of a worker’s status is not certain, it may be tempting to play it safe and treat them as an employee. This can result in employer’s national insurance contributions being paid unnecessarily and the worker will likely resist if they strongly believe they are a self-employed contractor. 

Historically, the risk to the firm of getting it wrong could be avoided by engaging the worker through their own limited company. In that situation, the worker could still be deemed an employee of the firm but the liability for underpaid PAYE duties lays with the limited company.

The rules changed for public sector bodies engaging workers through limited companies in April 2017. Public bodies are now responsible for the status assessment, thereby shifting the risk back to the engager. 

In the Budget 2018 it was announced that this change is being extended to medium and large businesses in the private sector with effect from April 2020, but will not apply to small businesses (typically those with turnover of less than £10.2 million). There will be a further consultation on the detail of this change before draft legislation is published. 

The result is that, with the exception of small practices, from April 2020 the risk of getting the status assessment wrong will lie with the firm.

Firms may wish to consider reviewing their consultancy contracts now, in anticipation of the new rules, and we can help with this review. Any worker engaged through a limited company who could be viewed as an employee may need to be added to the payroll, unless the nature of the engagement can be changed.