Recent media attention has raised the question: ‘Are you an employee or genuinely a self-employed contractor?’ BBC presenter Christa Ackroyd was held liable for tax in excess of £400,000 because the courts considered her to be an employee of the BBC, despite her services being paid through a separate limited company.
This is as an important victory for HM Revenue and Customs (HMRC) as it is the first time in seven years that HMRC hae won a so-called IR35 claim.
If an worker is found to be a ‘disguised employee’, the financial impact of IR35 can be significant. This results in them having to pay income tax and national insurance contributions (NICs) as if they were employed, potentially reducing their net income by up to 25%. Additionally, there may be interest and penalties for late payment.
How do employers know whether it has ‘disguised employees’ at its organisation? To explain, this is where an organisation engages workers on a self-employed basis, sometimes through an intermediary organisation, rather than using an employment contract. There will be no pay-as-you-earn (PAYE) deductions, national insurance or pensions paid and no employment rights or holiday benefits bestowed. However, to all other intents and purposes, they are employees.
In the case of Ackroyd, the main indicators in her case which led to the ruling she was a ‘disguised employee’ was that that her role was continuous and steady, the BBC had ultimate say over what services her limited company would provide, and that her contract restricted her from providing services to other organisations. In essence, treated as an employee.
So what should employers consider prior to engaging self-employed workers to avoid confusion? Firstly, employers should have in place a good contract that will have all the legal or tax requirements to ensure that they satisfy the rules on substitution, level of controls, who pays tax etc. Employers should ensure it receive invoices from the self-employed worker and has a clear project based, or hourly, or daily payment system that combats any concern that self-employed workers are actually employees and, where appropriate, employers should make sure self-employed workers carry their professional insurances and bring their own equipment.
Furthermore, a lack of work or end of a project should enable the contract to lapse or be terminated and self-employed workers should not be forced to work solely for the employer’s organisation. Where possible and suitable, employers should not seek to force working times, uniforms, or employee policies on self-employed workers, or pay holiday or sick pay. Lastly, employers should allow self-employed workers to substitute themselves for someone else if suitable.
Ultimately HMRC and the courts look at the actual facts of any situation to determine the relationship between the parties. It is important employers keep clear and accurate records, and remain careful that they do not blur the lines.
Karen Holden is founder at A City Law Firm