Self Employed

Employed, Self-employed or Contractor? – Don’t get caught out!

March 28, 2018

Don't get caught out by the employment status rules. Learn how to determine if you are employed, self-employed, or a contractor with TAG Accountants Group.

As Accountants and Business Advisors, we’ve helped our clients steer clear of some of the potential pitfalls that can arise following the recent changes in HMRC’s rules on employment status; particularly those regarding the self-employed and contractors using personal service companies (“IR35”).

With that in mind, set out below are a couple of areas worthy of note:

Last year, the House of Commons Work and Pensions Committee published a report calling on the Government to close the loopholes that allow “bogus” self-employment practices, which it felt placed a burden on the welfare state in that they reduced the tax contributions needed to sustain it. The report recommended that there should be a default assumption of “worker” status, rather than “self-employed”, and suggested that a new category of “dependent contractor” be established.

Determining Employment Status

Following further consultation, HMRC have recommended that all individuals and their employers must determine an individual’s employment status, and not seek to avoid paying entitlements such as National Minimum Wage, holiday pay, unfair dismissal protection and statutory redundancy pay.

The objective is to create a clear and effective tax base so that an appropriate rate of tax and National Insurance Contributions (NICs) are then levied on an organisation.

Applying the Test

Existing legislation defining an employee for both tax and employment rights ultimately relies on whether a contract of service exists. Interestingly, no further definition or clarity is provided. Consequently, the courts have interpreted the legislation and developed tests to determine an individual’s employment status. These tests are contained in a few key precedent cases, including a mixture of employment rights and tax judgments.

Minimum core tests established by case law to determine whether an individual might be defined as employed or not consider such things as:

Mutuality of obligation
Control over the individual
Personal service

As current employment status tests are open to some interpretation and given HMRC’s default position, it is now vital that businesses ensure existing contractual arrangements for self-employed individuals “pass muster”.

Don’t Get Caught Out

HMRC have recently won a key case on IR35 legislation concerning the BBC presenter Christa Ackroyd who had been supplying her services to BBC through her personal service company Christa Ackroyd Media Services Ltd since 2006/07.

The Tribunal agreed with HMRC that the hypothetical contractual arrangement between the BBC and Ms. Ackroyd was highly stable, regular and continuous, involving a high degree of continuity, rather than being a succession of short term engagements.

Of course, being deemed employed rather than self-employed has wide ranging implications for the amount and indeed the timing of any tax and NIC levied in each case.

Get Expert Advice from Your Accountant

Given the plethora of grey areas and/or potential pitfalls outlined above, what then can a business do to protect itself from or reduce exposure to any sudden or unexpected tax bills?

It is important to seek out expert advice, so get started by talking to the accounting, business and tax experts here at TAG Accountants Ltd, Wolverhampton. HR and/or contract review services are available where required on a case by case basis.

To discuss how our free initial consultation might benefit you or your business, just call us today on 01902 783172 or use our contact form by clicking HERE.

We very much look forward to hearing from you.