Although there is no clear-cut answer to this question, HMRC has a series of guides for tax and national insurance contributions. This sets out the steps and a series of questions to test the particular circumstances of any working relationship.
These cover areas such as:
- Ultimate control of the work
- Personal service
- Right of substitution
- Basis of payment
- Holiday pay, sick pay and pension rights
- Part and parcel of the organization
- Right to terminate a contract
- Opportunity to profit from sound management
- Personal factors
- Length of engagement
- Profit element, and risk of loss
- Provision of materials and equipment
- Integration with the employer’s business
- The intention between the parties
- Mutuality of obligations
- Usual conditions in the industry
- Intention of the parties
Note, it must be emphasized that status is not running through the above checklist, it is rather a matter of assessing the overall picture that emerges from consideration of the facts. These are matters of general employment law, and not specific tax legislation.
This is a developing area, with those working in the ‘gig’ economy, such as drivers for Uber, challenging their “employer’s” view that they are self employed in order to seek employee or worker rights, including paid holiday and membership of an auto enrolment pension arrangement.
Although recent cases heard by the Employment Tribunal are not effective for tax purposes, it is very likely that the tax treatment of the self employed, and indeed self employed status will be reformed before too long.
The Uber decision, which rules that drivers were “workers” – a slightly less favourable status than employees – is under appeal by Uber.
It may be tempting to cut payroll costs by engaging former employees as self-employed contractors. There are risks attendant with this strategy but if done correctly this can be a tax efficient approach.
For HMRC to accept the self-employed status it should be evidenced that:
- The worker operates a business assuming risks such as rectifying work, invoicing and waiting for payment
- The worker is not required to work for a particular engager
- The engager is not obliged to use that worker’s services; and
- The engager does not have the right to control what the worker does.
A person is generally classified as a ‘worker’ if:
- They have a contract or other arrangement to do work or services personally for a reward;
- Their reward is for money or a benefit in kind;
- They only have a limited right to send someone else to do their work;
- They have to turn up for work even if they don’t want to
- Their employer has to have work for them to do as long as the contract or arrangement last; and
- They aren’t doing the work as part of their own limited company in an arrangement where the ‘employer’ is actually a customer or client.
HMRC has also developed a series of points based entity tests. A business will be scored on a number of key criteria which can enable them to review if they are a low, medium or high risk of being caught by the IR35 legislation and how he does it.
Where a contractor is engaged through his own limited company, the engaging business does not carry a risk that he will be recategorised as an employee. Instead special tax rules known as the intermediaries legislation or IR35 may apply. These use a similar test to establish the tax treatment of the contractor, but it is the contractor who bears the PAYE and NIC if the rules apply