Whether someone is employed or self-employed has long been a matter for debate and argument with HM Revenue & Customs (HMRC) with HMRC generally angling for an individual to be classed as an employee purely as there is a larger tax and NIC take to be had (with the Employer suffering an additional 13.8% national insurance liability on gross salaries paid). Beyond the tax realm, having an employee brings into focus such responsibilities as holiday pay, pension schemes, sick pay and so on.
So how can you tell if one of your workers is self-employed or employed? Despite years of legal wrangling, it is still not a simple task. Some will argue that control (or lack of it) is the key to determining the employment status of a worker but this is not the case. Whilst the element of control or oversight does play a large part, there are a lot of factors that are taken into account and each situation is different with more or less weight being lent to different factors depending on each case in question. Even outwardly straightforward cases such as a franchisor / franchisee relationship can be decided as one of employer / employee as the Supreme Court decided for Autoclenz in 2011. In fact, an individual may even be self-employed on one contract and employed on another, seemingly undertaking the same task, but for different companies and with only very subtle differences in how he undertakes his work. It is the contractor/employer’s responsibility to decide whether or not someone is self-employed.
An individual’s employment status will depend primarily on whether they are working under a contract of service (employment) or for services (self-employment). This will turn on a number of factors including, but not restricted to: where, how and when the work is performed; whether an individual risks his own money in what he does and has to suffer any loss to put right any mistakes at his own time and expense; whether he provides his own tools and staff; and can substitute someone to perform his task in his place. The element of control is also considered which includes whether the individual works where he is told to (or is free to work where he wants), is paid at set intervals, has someone telling him how to do his work, and so on. However, with the increasing level of “mobile working”, the sight of office workers occasionally working away on their laptops on Aldeburgh Beach will confuse the notion of working where you are told to. For any particular employment status review, some or all of the factors may be taken into account, others may be completely irrelevant.
In the Autoclenz case, the Supreme Court looked specifically at the Degree of Control and the Right of Substitution – being able to send someone to do your work if you want. Although in the contract, terms were laid down that meant it was possible that the Right of Substitution formed an important and intrinsic part of the agreement between the “employer” and “employee”, the judge held that what actually happened in reality was completely different to what had been drawn up. The Contract, in his opinion, was mere “window dressing” and that franchisees were not, in reality, free to provide their own staff and that it was essential that valeters undertook the work personally.
The drawback for an employer in all of this, of course, is that if you make a decision and get it wrong, HMRC will still want to collect all of the tax and NIC that you should have stopped from your employee’s wages. At the same time, you will find it extremely difficult to recover those same monies from your employee. This, therefore, is a subject to be treated very carefully.
And even if the Contract of Employment (or otherwise) had started off being adhered to, is what is happening now – possibly many years later – still in accordance with the original agreement? Should someone who was originally self-employed now be correctly classed as an employee?
For further information on any of the above points or to discuss your tax affairs generally, please do not hesitate to contact Robin Beadle.