Queries on the subject of whether someone is employed or self-employed occur frequently. Part of the reason for this is that employment and self-employment are not defined in tax law, and case law on the subject which includes employment law cases has tended to create further confusion rather than solve problems.
Some principles have emerged, as follows:
# Every case is treated on its own merits.
# Status is a matter of law. HMRC may state ‘X is employed’, but that statement can be challenged if the taxpayers have the funds and will to do so. This could involve an appeal to the Commissioners.
# The business that engages an individual to work has a major responsibility. The business (in conjunction with the worker) has to make the initial decision as to whether someone is employed or self-employed. If they engage someone on a self-employed basis and ‘get it wrong’, HMRC can recover PAYE and Class 1 NIC from the business, which may not necessarily be able to recover the amounts from the individual.
# In many cases HMRC, if asked for a ruling, will state ‘X is an employee’. It is in the interests of the department to have as many taxpayers as employees as possible. HMRC then exercise control over the situation, and the need for a self-assessment tax return may be unnecessary. The statement, however, can be challenged.
# The taxpaying individual may be placed in an invidious position if they work for a business that has made them ‘self-employed’, and it is clear that this is not the case. Any challenge to the status quo could mean the loss of their position (and work).
# It must be remembered that a self-employed person forfeits a number of rights under employment law, and some DWP benefits. An increasing number of cases have emerged where the worker wants to be self-employed for tax purposes but employed for employment law purposes!
It is against this background that two queries were posted on AccountingWEB’s Any Answers last week. One was by Richard Lewis on 16 November, who is working for a door company on a self-employed basis. The company has made him sign a paper stating that he is self-employed, and has also charged him employers’ liability insurance. Richard feels that the company is wrong and he is probably an employee. What should he do?
A lively discussion took place on site. Taking into account the principles I outlined above, more than one contributor suggested that Richard should register as self-employed with HMRC, pay Class 2 NIC and submit a self-employed tax return and accounts, while not overstating claimable expenses. There is a strong possibility that HMRC would then instruct their officials to undertake an Employer Compliance Review, which would reveal the true situation. This approach would ensure that it is not Richard who is ‘welshing’ on his employers, and he is observing his agreement with the company.
Two days later on 18 November Dave introduced the situation where his client pays four ‘self-employed’ workers, whom Dave considers are employees. The client is not too bothered about the consequences. Is there any HMRC literature that would serve as shock tactics for the client?
In this case the client should be shown any relevant HMRC literature about HMRC enquiries. The client should be informed that HMRC could impose PAYE tax and Class 1 NIC on him, and that he might not be able to recover these amounts from the workers, even though they could reclaim tax on their trading income from HMRC. In addition, the client could be liable to interest and penalties. He should also be made aware that an Employer Compliance Review is not a pleasant experience!
Dave might consider completing a calculation showing the effect of PAYE tax and Class 1 NIC for one month, together with a 100% penalty and interest on tax. This might bring the client to his senses!
John Newth is a leading tax commentator.
