Whether an individual is employed or not for tax purposes can be a complex answer to ascertain. Further, an individual may be classed as an employee or worker for employment rights purposes but, in some cases, may still be self-employed from a tax perspective.
The first step is to determine who has responsibility for establishing employment status and whether payroll should be operated. This will be dependent upon to whom and how that individual’s services are provided.
1. Individuals working directly for a business
It is the employer’s responsibility for determining the employment status of an individual working directly for them and deducting PAYE/NIC as appropriate.
Some indicators of self-employment include:
• They can hire someone to do the work or engage helpers at their own expense.
• They risk their own money e.g. buying materials, paying overheads, correcting unsatisfactory work at their own expense.
• They provide the main items of equipment to do the job.
• They agree to do a job for a fixed price, regardless of how long the job may take.
• They regularly work for a number of different people.
The HMRC website has an online questionnaire tool (known as CEST) that can be used to help determine status. HMRC has agreed to be bound by the result (assuming that it is completed accurately), therefore, a copy should be retained in case of an enquiry.
2. Individuals providing services via a third party
The agency rules apply where an intermediary/agency makes arrangements for someone to work for a third party and receives payment for that worker’s services from the third party.
In this case, it is the agency/intermediaries responsibility to determine the status of the worker and if PAYE should be operated. The main consideration here is whether the workers are subject to (or a right of) supervision, direction or control by anyone over the manner in which they carry out their work.
If it is determined that the individual should not be subject to PAYE/NIC, the intermediary may still be subject to quarterly reporting to HMRC. In general, reporting requirements apply where, in any given quarter, the intermediary has more than one worker that is providing services to a client and paid off-payroll.
3. Individuals providing services through a ‘personal service company’
HMRC has become increasingly concerned where individuals are operating via their own personal service companies (commonly known as IR35), that they may not always be deducting PAYE where due. According to HMRC statistics, only 10% of personal service companies that should be applying the IR35 rules are actually doing so.
From April 2020, the rules will change for ‘large’ private companies, with the responsibility for determining the worker’s status in such cases shifted to the end client rather than the personal service company. Full detail of the proposals are still under consultation, however, the rules will broadly mirror those introduced for public sector bodies in April 2017.
A large company is expected to be defined by the Companies Act definition, whereby two of the following three conditions must be met; turnover over £10.2 million, balance sheet total in excess of £5.1 million and more than 50 employees.
How we can help
With ever-increasing scrutiny and complex rules around who and how to determine employment status, we can help businesses to assess their responsibilities and determine worker status.
Please visit our Employer Services webpage here