At the end of July, the government finally got around to publishing its response to the 2018 consultation on employment status. The consultation took place as the result of government concerns over false self-employment, particularly in the “Gig” economy. Employers and professional bodies have heavily criticised the updated guidance as it still lacks clarity. There is even separate guidance to employers and engagers dealing with employment rights and tax status:
Employment status and rights: checklist for employers and
other engagers - GOV.UK (www.gov.uk)
Check employment status for tax - GOV.UK (www.gov.uk)
Part of the problem is the lack of detail in employment
and tax legislation, which means that the law has to be interpreted by the
courts. The HMRC Check Employment Status for Tax (CEST) tool in particular has
been criticised by tax advisors for being too simplistic and biased towards the
presumption of employment.
Whether a worker is classified as employed or
self-employed has important implications in terms of their employment rights
and also their tax treatment. The self-employed tend to pay less tax and
National Insurance Contributions (NICs) at the expense of foregoing employment
rights such as sick pay, holiday pay, pensions and the right to bring an action
for unfair dismissal. Deciding whether an individual is employed or
self-employed is not a matter of choice. It will depend upon the particular
facts surrounding the relationship.
Getting employment status wrong can have serious tax
consequences. If an organisation gets it wrong and treats an individual as
self-employed when they should be treated as an employee, then they are liable
for the PAYE and NICs that should have been deducted. This traditionally has
led to many organisations insisting that the individual should supply their
services via an agency or their own personal service company (PSC) to avoid
this PAYE risk.
The ”off-payroll” working rules that were extended to
large and medium-sized engagers from April 2021, now require engagers to
determine whether a worker operating through a PSC would be treated as an
employee if directly engaged and, if so, deduct PAYE and NICs. That worker is
thus taxed as if an employee, but without full employment rights – the worst of
all worlds.
Employment Agencies may be liable for the tax of PSCs
As mentioned above, many organisations have traditionally
requested that workers supply their services via a PSC or an agency, because up
until 2021, that avoided the organisation’s PAYE risk. The IR35 rules meant
that if the individual would have been treated as an employee when considering
the hypothetical contract between the worker and end-user client, the PAYE and
NIC would be payable by the PSC and not the end-user client. Pursuing thousands
of PSCs is very expensive and inefficient for HMRC.
When the Onshore Employment Intermediaries: False
Self-Employment Legislation (s44 ITEPA 2003) was introduced, it had been
considered that this would not apply to the situation where an employment
agency supplied workers that operate through PSCs. Many felt that the rules
only applied to self-employed individuals and that the IR35 rules would take
priority if the worker had their own company. However, a recent Tax Tribunal
case (K5K Ltd v HMRC) involving the
supply of agency nurses and healthcare workers has determined that the agency
can be liable for PAYE and NICs. It is clearly more efficient for HMRC to
pursue the agency for PAYE and NICs rather than numerous PSCs.
Employment status is clearly a complex area so if you need
advice please contact us.
