Tax Factor
17 November 2010
Employed or Self Employed
The important question of status applies equally to the construction industry as to any other industry or business and HM Revenue & Customs have devised their own set of tests for arriving at the answer. Why is status so important and what are the consequences of getting it wrong?
An Italian proverb states that “At a round table there is no dispute about place“ but unfortunately when considering whether someone is employed or self-employed HM Revenue & Customs (HMRC)are not sitting at a round table and there are disputes aplenty, particularly when it comes to the construction industry.
A worker’s status as an employed or self-employed earner will determine both the charge to tax on the income from that engagement and the class of National Insurance Contributions to be paid. As HMRC seem to regard the self-employed as responsible for a haemorrhaging of tax and national insurance it is important to ensure that you get the status of your workers right.
The determination of status is not a matter of choice but depends upon the terms and conditions under which the worker is engaged for that particular engagement. The terms and conditions should reflect the reality of the situation since HMRC will not accept that a worker is a self-employed earner under a purported contract for services if, on balance, he is really acting as an employed earner under a contract of service.
It is the engager who is responsible for correctly determining the status of the worker and if the engager gets it wrong by categorising a worker as self-employed rather than employed then it will be the engager who will be expected to meet underpayments of Income Tax as well as both the employer’s and employee’s National Insurance Contributions, usually on a grossed-up basis.
Court and Tribunal cases have indicated that there is no single test to determine the status of a worker and it is important to consider all factors that are present in, or are absent from, a particular engagement.
Factors needing to be considered, some pointing towards employment and others towards self employment, include:-
- Personal service - an employed worker is required to provide his services personally.
- Mutuality of obligation - the minimum obligation for a contract of service, (employee), are for the worker to give personal service and for the engager to pay for that service.
- Right of control - the engager has a right of control, whether or not that control is exercised i.e. what, how, where and when the services are performed by an employee.
- Right of substitution - a self-employed earner will often have a right to send a substitute worker and will pay that worker out of his own pocket.
- Provision of own equipment - a self-employed earner would normally provide their own equipment to do the job. This would include major items of equipment and not simply loose tools.
- Financial risk - a self-employed earner will put at risk his own money in his business. There should be a risk of making a loss, perhaps by having to rectify poor workmanship at the workers own expense, or an opportunity to profit through efficiency savings.
- Length of engagement - this is not decisive although an open-ended contract, a series of consecutive contracts or an ongoing expectation that work will be provided may well point towards employment.
- Part and parcel of the organisation - a person who is an integral part of an organisation will usually be regarded as an employee e.g. a manager.
- Employment type features - paid leave, pension provision, use of canteen facilities, company car and notice periods etc will point towards employment.
- Mutual intention - the intention of the parties is only likely to be relevant if all other factors, considered together, do not point conclusively towards employment or self-employment.
To determine status it is necessary to evaluate overall effect but, as indicated earlier, it is important that employers determine status correctly or the consequences could be very expensive indeed.
HMRC will contend that ignorance of the situation is no excuse as they provide an Employer Helpline and an Online Status Indicator for the engager who is in any doubt over whether their new worker is employed or self employed.
For further assistance in avoiding the status trap please contact any office of Wilkins Kennedy.
