“Employed or self-employed?” that is the question. Also known as employment status, this has significant tax, national insurance and legal implications. Getting this question wrong for someone you pay is one of the most expensive tax mistakes that an organisation can make.
The question of whether someone is employed or self-employed is then a question of fact judged by characteristics of the circumstances. If your worker acts like an employee, looks like an employee and works like an employee, then they probably are an employee.
The main criteria used in assessing whether a relationship is employment or self-employment are as follows:
- Control: If the organisation paying can control the methods of work this points to there being employment
- Substitution: If the worker always does the work personally and have never sent a substitute worker, then this points towards there being employment. The individual must have the right to send a named substitute, and actually have sent them in place of themself, for these criteria to point towards self-employment
- Obligation: If the there is a notice period, even for as little as one day, this points towards employment
- Business characteristics: If the worker has no financial risk, if they do not have to correct work at their own expense, if they do not have to have their own insurance and provide their own equipment, then this is an indicator of employment.
Some common misconceptions about whether someone is self-employed include:
- I have a unique tax reference (UTR) issued by HMRC for my self-employment
- I only work part time
- My contract is only for a short time
- My hours are flexible
- I work from home
- I have other customers or clients.
Unfortunately, none of the above points make someone self-employed.
The consequence of paying someone as a self-employed person when they are in fact employed is that national insurance and tax will be significantly underpaid. When HMRC carry out a compliance check on the paying organisation there is likely to be additional costs with interest and penalties.
Directors
One final aspect of employment status relates to directors. A director cannot invoice his own company for his services on a self-employed basis (with very limited exceptions which rarely apply to SME directors). The director must be paid by salary, or if a shareholder then also by dividends. This is regardless of the relationship between you, your company and your company’s client. See our factsheet here for further details.
Personal Service Companies and IR35
If your worker charges you through a limited company, you do not have put them on payroll. However the workers company will then need to consider IR35 (formally known as The Intermediaries Legislation).
If you would like to discuss this in more detail relating to your business, please feel free to book a free online meeting
