When there is a doubt over status of a worker being an
employee or self employed the employer must make the
correct decision or face potential serious penalties
relating to a change in status that can be applied
retrospectively. In the absence of comprehensive
legislation guidelines have emerged and must be applied to
avoid potential unexpected liabilities of tens of thousands
of pounds.
The employment status of a worker can be a veritable
minefield for an employer if the wrong decision is made.
Should an employer decide the status of a worker is self
employed and treat that worker as self employed rather than
deducting tax and national insurance the employer could be
at risk of incurring a major financial liability for tax
and national insurance deductions if the status of the
worker is subsequently changed following an Inland Revenue
enquiry.
If the status of a worker is changed from self employment
to employee by the Inland Revenue the amounts paid to that
worker would be regarded by the Revenue as not the gross
pay but the net pay after deductions of income tax and
national insurance. The re-assessment after adding the
income tax and both employee and employer national
insurance could increase the cost of that worker by more
than 50%.
If a workers employment status is determined as incorrect
by the tax authority the date at which the employment
status was employee rather than self employment would also
be determined. Such a status change and the applicable date
could be applied several years retrospectively leading to a
significant financial burden.
An employer cannot choose the status of a worker as
employee or self employed. The status of the worker is
dependent upon the rules of engagement and the working
practices that ensue. There is also a tendency with long
term engagement of self employed workers for circumstances
to change and some changes could change the status of that
worker from self employment to employee in the view of the
tax authority.
The first essential question to be answered by an employer
is whether the worker is being engaged under a contract of
employment or whose services are being contracted. Due to
the potential serious financial consequences of making the
wrong decision it is important that the rules of engagement
are set out and agreed in writing.
There is no statutory definition of what constitutes a
contract of service and what constitutes a contract for
services in relation to income tax and national insurance.
In the absence of a statutory definition the interpretation
of the nature of the relationship is open to debate and
previous court judgments.
General rules which would indicate a worker was an employee
would include scenarios such as is the work supervised,
does someone state when, what and where work is done and
how it should be done. Can the worker be moved from one
task to another and does the worker work to set hours and
paid on a set basis of hourly, weekly or monthly or receive
bonuses or overtime payments. The existence of such
conditions would indicate employee status not self
employment.
There are many other factors which may determine employment
status, for example if the worker takes the business
vehicle home each day that would indicate employee status.
Should the worker provide his own tools and equipment to
perform the tasks and bear the costs of doing this then
self employment would be indicated but should the employer
provide such equipment then workers status is more likely
to be interpreted as employee.
Factors which may determine self employment would include
the worker using someone else to carry out the tasks at
their expense, whether the work contained personal
financial risk to the worker, has a fixed price been agreed
regardless of time taken to perform the work. Other self
employment factors would be if the worker can choose when
and how to perform the tasks, whether they also work for
other organisations and whether unsatisfactory work has to
be corrected in the workers own time and expense.
The conditions under which a worker is engaged may be
ambiguous and that can lead to problems as long term self
employed workers and the relationship with the employer
tends over time to slip into a pattern that might be
interpreted as closer to that of an employee rather than
self employment. In such circumstances what may have
started as self employment may later be interpreted as
employment in which case the specter of that workers cost
being increased to the business by 50% going back years
could become reality.
In all cases where there is doubt over the employment
status the final decision becomes one of providing evidence
and the weight of evidence for one side or the other. Often
individual cases can rest on what may have been regarded as
insignificant items at the time. For example granting the
worker benefits normally associated with employment such as
paid leave and even such items as access to subsidized
canteen facilities could weigh the balance in favour of
employment.
If an employer has doubts on the status of a worker the
rules of engagement should be set out in writing at the
outset and clarify the status as employee or self
employment. If there is any doubt then the safest practice
would be to treat the worker as an employee and deduct
income tax and national insurance or engage the worker
under the CIS sub contractors rules.
As a rough guide to the financial consequences of making
the wrong decision or circumstances changing the status of
a worker from self employment to employment without
deducting tax and national insurance consider this example.
The worker has performed work for the business for 3 years
as self employed and has been paid 25,000 pounds per annum.
The normal work pattern is interpreted by the Inland
Revenue as that of an employee not self employment.
The Inland Revenue could determine income tax of 5,000
pounds and national insurance of 2,000 pounds should have
been deducted plus employer national insurance of a further
2,000 pounds. Over three years the bill for getting the
decision wrong could result in an unexpected bill for the
employer of 27,000 pounds. For a small business that level
of additional cost could be the difference between survival
and liquidation.
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Terry Cartwright, accountant and CEO DIY Accounting,
designs Accounting Software at
http://www.diyaccounting.co.uk/ providing accounting
solutions for small to medium sized business in the UK with
payroll software at
http://www.diyaccounting.co.uk/payroll.htm for up to 20
employees