It’s important for you to know the employment status of the people who work in and around your business. One key reason is that you might be responsible for PAYE and NI. If you fail to make the right deductions from payroll and the correct payments to HMRC, you are liable to back tax, interest and penalties. So there is a lot of risk if you are not absolutely clear about the status of your team members.
Rules around this have been updated a number of times. This article covers the latest guidance from HMRC. (The image illustrates pre-Covid nostalgia and is not current workplace safety advice.)
What are the rules?
One of four different tax regimes apply to people who work for you, rather than those who are on the payroll – the latter clearly agreed to be employees and treated as such, with you making PAYE and NIC deductions and payments in relation to their salaries.
IR35 rules apply in the private sector where your worker is controlled by an intermediary, such as the agency that supplies them. This intermediary has to manage payroll appropriately. You, as the end customer, do not.
Off-payroll working rules
The off-payroll working rules are currently the subject of new guidance. HMRC has indicated that, if you fail to apply the rules correctly but this hasn’t happened deliberately, no penalties will apply for the next 12 months
Managed service company rules
The managed service company rules tend to be schemes or small payroll companies that manage your payroll for the individuals offering you their services.
In this case, the individual might consider themselves self-employed and the managed service company will be invoicing your business. But, in the background, the managed service company is providing the individual with a payroll function for whatever part of their income is salary (and with dividends for the remainder).
The company might operate as a service provider to many people. In this case it will effectively be a group scheme comprising, say, 10 to 20 individuals, each paying a fee to have their income managed through that scheme.
These rules also apply where a company is managed just for one individual, and the company manager then acts as a payroll function for that one individual.
From the perspective of your business, you will need confirmation from the managed service company that it is treating the individual as an employee and is responsible for the PAYE/NIC for them.
In practice, problems have arisen where these companies have processed all the income to an individual via dividends. HMRC is not then able to see any evidence that PAYE/NIC has been paid for this person, whose day-to-day work arrangements (for all other purposes) look to HMRC like those of an employee or worker and not a self-employed, risk-taking business owner.
Agency rules cover a traditional employment agency that supplies temporary employees for your business. The employment agency business is the employer who handles payroll, PAYE and NI deductions.
Most of these rules are driven by liabilities around PAYE and national insurance (NI). When they were first introduced (especially IR35 in 2003), they were seen to be trying to reduce perceived tax avoidance, where people arrange their lives on a self-employed basis so they pay considerably less tax and virtually no national insurance contributions compared with an individual who does identical work on an employed basis.
Employment status issues have been magnified by the growth of the gig economy. This has come to a head recently in a number of cases, particularly Uber, where the Supreme Court upheld previous employment tribunal decisions that drivers using their app to obtain work are workers and not self-employed.
This has many implications. Among other things, according to this decision, Uber drivers are now entitled to:
- National minimum wage
- Protection from unlawful deduction from wages
- Paid annual leave
Now that the test case has been decided, I understand that there are a vast number of matching and/or similar cases awaiting an outcome, or which may now be the subject of claims. It is not hard to imagine that the additional financial liability it appears to bring to Uber will potentially have a huge impact on the structure and feasibility of its business model.
The same could be said of other gig economy businesses, even if they are not on Uber’s scale.
These and other parts of the related rules have already lead to relevant case law in a range of other scenarios, such as cycle couriers, art experts who are educators for the National Gallery, foster carers providing intensive foster care, labourers in the construction sector who were previously described and treated as self-employed, salespeople who earn commission even if the contract describes them as self-employed, IT contractors with just one client, duty doctors who work for NHS health providers through a service company, and many more.
What this means to you
If your business model is built on the premise that your gig team members are self-employed, you really need to be confident that you are correct in that assumption, because the alternative would have significant financial and legal implications for you.
You need to be aware that the court doesn’t decide the issue by seeing how you have labelled the relationship or whether the individual identifies as employed or self-employed. The courts assess the facts against statutory definitions for a worker or an employee, and seek to apply the purpose of the statute – this is to protect vulnerable individuals in relation to their working lives.
As with many things in law, assessing employment status is not straightforward.
A person might have one employment status for tax purposes, and another employment status for employment law purposes (in relation to their other rights as an employee). These are not assessed in identical ways. The answers will usually follow, but they are not always the same.
Therefore, you must be really careful in your assessments and arrangements around people who work in your business.
You should be able to clearly identify for tax purposes which of the following is the correct status for each individual:
- Workers (the interim category)
- Full employment (full-time or part-time)
As well as tax and NI, an individual’s employment status affects their employment rights.
Employees have the most rights, but workers – an important subset – have some employment rights too (such as paid holiday and holiday entitlement, national minimum wage and sick pay).
One more thing. You also need to know who owns any intellectual property created by an individual in the context of your business. For many modern businesses this is a really important issue.
If you need help with any of this, please let us know.