Questions of employment status are one of the most common problems that we see. The most basic instance of this question is am I employed or self employed?. This is a very important question as it has huge tax, national insurance and legal implications. Getting this question wrong is one of the most expensive tax mistakes that a person in business can make.
Initially, let’s assume there is no limited company involved. The question of whether someone is employed or self-employed is then a question of fact. This is judged by characteristics of their circumstances. If you act like an employee, look like an employee and work like an employee, then you 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 you can control the methods of work this points to there being employment.
- Substitution. If you always do the work personally and have never sent a substitute worker then this points towards there being employment. You must have the right to send a named substitute, and actually have sent them in place of yourself, for this 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 you have no financial risk, if you do not have to correct work at your own expense, if you do not have to have your own insurance and provide your 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. It is quite easy and common to have an employment situation where all of the above apply.
The consequence of being paid as a self employed person when you are in fact employed is that national insurance and tax will be significantly underpaid. When HMRC carry out a compliance check on the organisation paying you, there is likely to be additional costs with interest and penalties.
Remember, if you are paying someone to help you, then you need to decide on their employment status. If in doubt speak to us. It is better (and much cheaper) to set up a simple payroll system and deduct PAYE and NI correctly than to incorrectly treat your helper as self employed.
If you are trading through a limited company the situation is very similar. The Intermediaries Legislation (aka IR35) asks the question, “were it not for the limited company, would you be an employee of the organisation paying you?”.
The same four criteria are used to assess the situation as outlined above. Whilst your limited company cannot be an employee of the person paying you (there is no such thing as a limited company employee), your company will have to pay you all of its earnings (with some limited deductions) as salary with full employees and employers national insurance. This effectively means you cannot pay dividends from your company if you are like an employee of the organisation that your company does work for.
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). 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.