Employed or self-employed?

The question as to whether or not someone is employed or self employed is not as straightforward as it might at first appear. Many people assume they are free to choose but HMRC emphasises that this is not the case.
How do you decide?

Although there is no clear-cut answer to this question, HMRC has published a leaflet which sets out a series of questions to test the particular circumstances of any working relationship. It covers areas such as:

• Ultimate control of the work     
• Profit element and risk of loss
• Provision of materials and equipment  
• Integration with the employer's business
• The intention between the parties 
• Usual conditions in the industry

Note, however, that these are matters of general employment law and not specific tax legislation.  During the recession, it may be tempting to cut payroll costs by engaging former employees as self-employed contractors. There are risks attendant with this strategy but, if done correctly, this can be a tax efficient approach.

For HMRC to accept the self-employed status, it should be evidenced that:

• The worker operates a business, assuming risks such as rectifying work, invoicing and waiting for payment;
• The worker is not required to work for a particular engager;
• The engager is not obliged to use that worker's services; and
• The engager does not have the right to control what the worker does. 

What if you are wrong?
It is the responsibility of the person making the payment to get it right. If you treat a worker as self-employed and subsequently, he or she is ruled to be an employee, you could find that all the payments you have made will be treated as net payments and you will have to pay the corresponding tax and employees' NI, as well as the employer's NI.  You may also have to pay interest and penalties for incorrect returns.

Can you create conditions to favour self-employment?
If you want to substantiate a classification of a worker as self-employed, we strongly recommend that you have drawn up (and enforced) a suitable contract, defining the services provided. In line with the tests referred to above, you will need to give particular consideration to the following points:

Pricing
One of the main requirements is that self-employed workers bear some element of risk in the arrangement, which means you will have to avoid the 'hourly rate' in favour of a 'price for the job'. The main principle is that the price, scope, and timing of the work should be agreed and evidenced in writing before the job commences.

Workmanship
Within reason, the more freedom the worker has in the detail of the way the work is carried out, the better. You must also make it clear that the worker will have to put right any faulty work at his or her own expense.  One of the strongest tests of self-employment is the right to substitute a worker who is equally capable of carrying out the work.  All self employed workers should hold public liability insurance.

Provision of equipment
Where practical, the worker should supply at least some of the important equipment or tools. Of course, the extent to which equipment is required depends upon the nature of the work.

What about the construction industry?
The construction industry is subject to exactly the same rules as any other type of industry. However, there are some special considerations.

Where the work entails use of heavy equipment or expensive plant, it is sometimes recommended that contractors hire the equipment to their subcontractors, who then include the cost within their 'price for the job'. Such arrangements may seem artificial, and there is the danger that with substantial hire costs being included in the pricing, the subcontractor's turnover may breach the VAT threshold and force him or her to register for VAT. However, this is not necessarily a bad thing because VAT registration is often cited as further evidence of self-employment.

With regard to pricing work, a competitive tender is best.  However, in practice, it should not really matter who makes the first suggestion of an appropriate price.

Although there is a special scheme for taxing construction industry workers, registration as a subcontractor under the scheme, in itself, does not necessarily prove self-employment status.

How can Meades & Company help?

In order to provide a level of protection against challenges by HMRC on our main contractor clients and to protect the self-employed status of subcontractors, we have developed a self-employment contract for services.  The contract has been tried and tested by HMRC and enables main contractors to add a further layer of protection above existing procedures, to ensure that the self-employed status of your subbies is accepted as fact by HMRC.

If you would like further information on our self-employment contract for services, please contact us on 01923 800444.