Recent employment and tax law decisions highlight risk that "self-employed" individuals engaged through their own companies could be employees.
Clients often seek advice on the employment status of such individuals and the risks of mislabelling the arrangement. We set out below some of the key considerations for those engaging consultants or freelancers under a contract for services. Alongside legal advice, organisations in these circumstances are advised to seek advice from a tax specialist or accountant.
Direct engagement of a "self-employed" individual
Where an organisation engages a nominally self-employed individual under a contract for services there is a risk that the individual could be found to be employed by the organisation for tax purposes. This could give rise to HMRC demands for tax / National Insurance Contribution (NICs) arrears, interest and penalties. There is a separate risk that, if the individual brings a claim in the employment tribunal, they could be found to be a worker or an employee.
Engagement of a "self-employed" individual through a personal services company
Where the services of an individual are provided through a personal services company or another intermediary, the 'off-payroll working' tax rules will apply (see below). Employment tribunals may (as a separate issue) look through any company structure and find that the individual is in fact a worker or an employee.
The off-payroll working tax rules (IR35)
As the law stands, any intermediary (for example a personal services company or partnership) providing an individual to an end user organisation in the private and third sectors under a contract for services is responsible for assessing the employment status of the individual for tax purposes. Where the individual would be an employee of the end user for tax purposes if it were not for the intermediary, the individual is in "deemed employment" and PAYE and NICs must be deducted at source by the intermediary. These rules are known as the "IR35 rules" or "off-payroll working" rules.
Currently, public sector organisations which contract with intermediaries for the services of individuals are responsible for this employment status assessment and for making deductions at source before making payment to the intermediary.
Upcoming change to the off-payroll working rules for medium and large companies
From 6 April 2020, medium and large incorporated companies in the private and third sectors will take on this duty to decide on employment status and to deduct PAYE / NICs at source before making payments to the intermediary.
Companies are caught by these new rules if two or more of the following apply for two consecutive accounting years:
- Turnover of more than £10.2m;
- Balance sheet of more than £5.1m;
- Average number of employees by headcount (over the accounting year) of more than 50.
Organisations should think ahead and consider whether existing and new consultants or freelancers will be found to be in deemed employment and fall under IR35. In particular, they will need to consider whether the application of the new tax rules will lead to a renegotiation of the contract price because of deductions at source. HMRC guidance is available on preparing for the new rules. HMRC also provides a useful on-line tool for making the employment status assessment for tax purposes. This is available at https://www.gov.uk/guidance/check-employment-status-for-tax.
A recent tax tribunal case: Christa Ackroyd Media Ltd v Revenue and Customs Commissioners
The Upper Tribunal of the Tax Chamber has recently upheld the decision of the first tier tax tribunal confirming that the personal services company of former Look North presenter Christa Ackroyd should have accounted for tax and NICs amounting to £419,151 in relation to her work for the BBC. This decision was based on a finding that Ms Ackroyd was controlled to a significant degree by the BBC and was therefore in deemed employment for the purposes of the IR35 rules. Key to this decision were findings of fact by the first tier tribunal including that the BBC had ultimate editorial control over the content and format of Look North, that Ms Ackroyd was not able to work as a presenter for another organisation without BBC consent and could be required by the BBC to provide her services and to attend public events. This finding of sufficient control was upheld despite Ms Ackroyd not having a line manager, not being subject to the internal BBC appraisal process and making suggestions from time to time about the format of the programme which were taken up by the BBC.
It should be noted that this decision relates to tax years prior to the commencement of the new rules imposing a duty on public sector bodies to assess employment status for tax.
Is the individual an employee or worker under employment law?
Where the reality of a working arrangement suggests an employment or worker relationship, there is a risk that an individual could be found to be an employee of the end user for employment law purposes (no matter whether the written documents indicate otherwise). The employment tribunal will consider a range of factors when deciding on this question, considering the arrangement in the round.
HMRC and the tax tribunal take a similar approach, although HMRC makes no distinction between workers and employees – both categories are in employment for tax purposes.
Employment status is not a cut and dried area of the law and different cases turn on their particular facts. There has however been a recent line of cases in which individuals who initially were happy to be treated as self-employed have been found to be workers or employees. This usually happens after the relationship sours, the individual becomes ill and/or their contract is terminated.
The key features of a genuine self-employment arrangement are:
- The individual can and does in reality on occasions arrange for and pay a substitute to carry out the work when unwilling or unable to carry it out. There should be few, if any, restrictions on this right to send a substitute. For example, there may be a stipulation that the substitute has certain qualifications or licences, but otherwise the end user has no right to reject the substitute.
- There is equal bargaining power between the parties – for example because of the individual's specialist skills.
- The consultant is clearly in business on his or her own account – for example, the individual might be engaged by many others and market their services broadly.
- The individual takes a financial risk in the arrangement (for example payment is only made on satisfactory completion of the project) and has indemnity insurance.
- The individual decides how and when the work is done – there is little day to day control or line management by the end user organisation.
- There are no or few
restrictions on the individual's
business outside the arrangement. Restrictive covenants such as non-compete clauses suggest an employment relationship rather than a contractor / client relationship.
- The individual is not integrated into the client organisation. For example, they do not represent the business or have to comply with a staff handbook in the same way as employees.
Employment tribunal claims - key workers' and employees' rights
A successful employment tribunal claim could lead to a finding that a consultant is in fact a worker and entitled to such rights as the National Minimum Wage, pension auto-enrolment, sick pay and statutory paid holiday.
If the consultant were found to be an employee, a tribunal might find that the individual had been unfairly dismissed, entitled to statutory minimum notice and/or redundancy pay.