Her Majesty’s Revenue & Customs (HMRC) make the point that to determine self-employment or employment: “for each engagement the whole picture needs to be looked at in the light of all the facts.” [leaflet IR56 / NI39]
But HMRC have a very strong determination to hold as many people in the PAYE net as possible; this means they must be classified as employees rather than self-employed. PAYE is a boost to the government’s cashflow since it receives tax and national insurance deductions each month rather than, as in the case of the self-employed, twice a year. In the past couple of years they have performed special audits in targeted industry-sectors such as graphic design and the IT industry. The most recent, and largest audit of its kind, has resulted in major changes to the building industry. Many subcontractors, and many of them who arguably should have been genuinely so classified, were forced into the PAYE net.
The force used on subcontractors was presumably legal, but it relied on creating fear. There is a section of legislation which states that it is the employer who is responsible for confirming the employment status of those they engage, and if they do not deduct PAYE where it should have been deducted then HMRC may seek to collect due taxes from the employer. Clearly no employer wanted to be put in the position of possibly being liable for his subcontractors’ taxes and so followed the HMRC dictat to put them into the PAYE net. There was an option offered; to approach HMRC for a ruling at the time of engagement. But HMRC seemed always to rule in favour of employment, or manage to leave a nagging doubt in the applicant’s mind which was usually met with caution, and PAYE. HMRC had clearly heard of the concept; “First we must teach people to fear the law, then we can teach them to respect it.” It is possible, but by no means certain, that a future HMRC may act with higher morality.
The ‘Johnny Walker wisdom’ that is freely given out in pubs across the land, as far as accountants can tell, is that if a person has more than one ‘employer’ they are therefore automatically classed as self-employed and individuals are often told to ensure that they do at least some work for one other person to protect their self-employed status. This is untrue. Although the existence of more than one person engaging you might be a factor in deciding if you are self-employed or not it is certainly not the only factor, nor the most important. It is the terms of engagement that dictate the position. So it would be quite possible to have several employers at the same time, or to be self-employed with only one client.
The general division between employment and self-employment can be summarised in the following comparison, which are the primary tools used by the authorities in determining tax status:
|Employer works out your tax as part of he PAYE system. The employer has responsibilities to deduct the correct tax and pay it over to HMRC, also to make certain declaraions each year confirming your tax position.||You are responsible for paying your own tax. Under the self assessment regulations you are also responsible for ensuring that you inform the Inland Revenue of your profits.|
|Employer works out National Insurance contributions and, as above, is responsile for paying them over to HMRC.||You are responsible for paying your own National Insurance contributions.|
|Your own money is not at risk if the business is not successful (generally).||Your own money is at risk if the business does not succeed.|
|You are not responsible for the profit or loss of the business (generally).||You reap the profits and suffer the losses.|
|You do not have an overall say in the running of the business (generally).||You make decisions and have overall responsibility for the way the business runs and the direction that it takes.|
|You do not set the charges for services or products sold. You are paid by time rather than by assignment.||You decide how much to charge for services and products sold.|
|You may not have a say in the clients you re expected to work for.||The have the right to decide which clients to work for.|
|You operate in your employer's name.||You operate in your own name (though franchisees may not look like it!).|
|You may not have, and do not need, the equipment necessary to do the work. The employer provides this.||You have the equipment to do the job and therefore a 'free agent' able to work for anyone who wishes to engage you.|
|Even if your role involves hiring people you must hire them under your company's regulations.||You hire people under conditions you set, deciding who and who not to hire. (Subject to legal restrictions.)|
|You do not have the right to substitute another person to do your job.||You do have the right to substitute another person or firm to complete your work. (Sometimes subject to contract.)|
|If ou have to make good defective work you will generally be paid for the time spent.||You will probably have to correct defectve work in your own time, and at your own expense.|
|You work at your employer's premises or where directed by the employer. (Changes in IT are resulting in many people working from home. however, they are still employees.)||You work at your own premises, though you may work at client's premises for certain purposes.|
The regulations frequently bring into PAYE people who really should not belong there, in that the regulations frighten the employers or agencies engaging temporary staff into ‘defaulting’ to PAYE rather than risk a battle with the taxing authorities. One acceptable way around the problem, particularly favoured by agencies who engage staff for - in particular - the building, architectural, high-tech and computer industries, is for the individual to form a Limited Company which then bills the agency or the client. This can, however, lead to you being on PAYE in your own company, with little saving and sometimes even more costs. (see the IR35 helpsheet)
It is also a ‘popular’ belief that once you have established yourself as self-employed, or employed, in one situation that it holds true for other engagements. This is not so. It is perfectly possible to be both employed by one business and self-employed in another at the same time. You could, for example, be a shop assistant during the day employed by the shop, and running a printing business from home in the evenings and at weekends. Even when you are working in similar situations for different people it would be possible - depending on the nature of your relationship with them - to be employed by one, and self-employed in your dealings with another. Each engagement is examined on its own merits.
Connor Spencer & Co can advise on your position regarding employment or self-employment and can assist in presenting your position to HMRC should your status be called into question.