Lynne Bell outlines some key considerations when considering a worker’s status.
When a business grows to the size where it needs employees, it may be responsible for more than initially thought. The extra responsibility and cost are just a couple of the reasons why this has become such a contentious issue.
A plethora of schemes have been used over the years to reduce the tax liability, and many employers still insist on their workers being self-employed, even though many might not meet the required criteria.
It's complicated!
The business will be responsible for statutory sick pay, maternity and paternity pay, and will be expected to manage without them (or employ temporary cover) while they’re off work. Employees are also entitled to paid holiday leave and the business will have the burden of employer’s National Insurance contributions (NICs). When an employee has been on the payroll for at least a year, they have the right to not be unfairly dismissed.
Businesses will also need to purchase employer’s liability insurance, which is another additional expense they wouldn’t have previously needed.
When all is said and done, employing people is not cheap and comes with a raft of responsibilities. Some employers have tried to get around this by claiming that their workers are self-employed, but HMRC is wise to this ploy and has created a set of criteria that determines whether employed or self-employed is the correct status.
Is the worker employed?
If just a few of these factors apply, HMRC could stipulate workers must be employed:
- Do they receive an amount of pay per hour, day, week or month?
- Are they paid overtime?
- Are they told where they should be working and what job they should be doing?
- Do they have to complete the work themselves?
- Can they be moved from task to task?
- Do you supply all the necessary equipment?
…or self-employed?
Analysing the above allows us to see the types of factors for workers to be classed as self-employed:
- Self-employed workers should be paid a price per job and not a time-related rate of pay;
- The time taken to do the job should not matter to the price they have quoted, as long as they meet agreed deadlines;
- They have the right to send someone else to finish the work, at their own expense, if they are ill or are needed elsewhere;
- They are there to complete the job they quoted for and cannot be moved between projects on a whim;
- They should supply their own tools and equipment;
- They should have their own liability insurances, as the business’s insurance might not cover self-employed people;
- They should work for more than one business.
The cost involved
Most workers classed as self-employed, but who should be employed, are discovered on HMRC’s PAYE audit visits. When this happens, the business must convince HMRC that its workers should be self-employed.
Failure to do so can result in the business (or its owner(s)) being liable to pay the tax and NICs that should have been deducted under PAYE. HMRC can charge interest and penalties of up to 100% of the tax due. Co-operate and the penalty will usually be closer to 10% but argue too much and they could charge the business a much higher penalty.
