When is a worker self employed as opposed to an employee?

INTRODUCTION

The Inland Revenue and the Contributions Agency have been routinely raising questions regarding the correct classification of so-called 'casual' employees and 'self- employed workers'. Now that the Contributions Agency is part of the Inland Revenue, Inspectors will be searching more vigorously for cases where, in their view, payments have been made without due regard to the PAYE system.

Employers and their staff need to know what the expressions 'casual employees' and 'self-employed' mean in relation to the PAYE system. The incorrect classification of workers frequently results in substantial arrears of PAYE and NIC being demanded from employers - plus interest thereon and possibly penalties.

The Revenue makes no distinction between small and large employers when investigating this area. For a small employer to unexpectedly face a bill for, say, six years' arrears of tax and NIC in respect of only one worker will often cause a significant financial problem. Where several workers are re-classified the viability of the employer's business may be called into question.

Clients' attention is therefore drawn to the following notes - please consult us for advice if you are in any doubt. These notes are not intended to be exhaustive, merely indicative of the issues to be addressed.

CASUAL EMPLOYEES

Problems here usually arise from the fact that the expression 'casual employee' has a different meaning within a particular trade or industry compared to the Inland Revenue's understanding of the expression.

The PAYE position is, however, quite clearly spelt out in the Employer's Guide. (N.B. There are special rules for farmers which are not covered in this Memorandum and there are special provisions concerning migrant workers.) As far as the Revenue is concerned, a casual employee is someone taken on for no more than one week and not taken on again in the same tax year. Thus, if someone is taken on for eight days he cannot be regarded as a casual employee. Likewise, if a worker is employed for five days in March 1999 having worked for one day in May 1998, he cannot be regarded as a casual employee. The PAYE system, according to the Employer's Guide, must be operated.

In addition, sometimes employers assume that, because an employee is properly called a casual employee, PAYE need not be applied. This is not so. The Employer's Guide makes it quite clear that, if the wages payment equals or exceeds the NIC weekly lower earnings limit (1999/2000 £66.00, 1998/1999 £64.00), a deduction working sheet needs to be prepared and NIC deducted accordingly. In addition, if the payment exceeds the PAYE threshold (1999/2000 £83.00, 1998/1999 £81.00 per week) either a code BR or the emergency code should be applied and tax deducted accordingly. Clients in any doubt about these rules should not hesitate to contact us for guidance. These rules will be applied to the letter by the Inland Revenue - even where any breach of these rules was arguably apparent at the time of previous PAYE inspections and no questions were raised.

WORKERS: 'SELF-EMPLOYED' OR 'EMPLOYED'?

The trouble here is usually caused by the mistaken belief that it is up to the employer to decide whether or not a worker should be engaged on a self-employed basis or as an employee. The position in law is that it is the terms and conditions of the contract with each worker that determines whether he or she is self-employed or an employee. The issues are complex and there exists many 'grey areas' but it is hoped that the following gives an indication of the matters that will often be addressed during a PAYE inspection by the Revenue. No one point listed below is likely to be conclusive in isolation and more often than not a number of factors determine the outcome.

Some characteristics indicative of 'employment'

The worker

is paid by the hour, day, etc. and provides nothing but his own labour (i.e. he does not provide materials, equipment, etc.) - especially if he is expected to work a regular number of hours each week

has no risk of financial loss (other than the risk of not being paid by the person for whom he is working)

has no identifiable business structure or organisation and receives a fixed remuneration

is working under the contractor's control or supervision

has agreed not to work for any other person

is closely integrated with and identified by customers as being part of the staff - typically he may have his own office, be described by name in company literature as part of the workforce, etc.

has a contract which is very similar to that of other individuals working in the business and accepted as being employees.

Some characteristics indicative of 'self-employment'

In the following circumstances the worker may have a case for arguing he is self-employed.

The worker

has some say on the type of work accepted, and how, where and when the work is to be done - the worker usually possessing skills and not requiring any training to perform his tasks

is not paid for work not done, has no holiday pay, pension scheme, benefits and provides own transport

can arrange, at his own expense, for someone else (suitably experienced) to carry out the work he has agreed to undertake

is paid per assignment undertaken, regardless of the time it takes him

provides plant, etc, used in carrying out the work

does not rely on a single source for his income and actively seeks other work

is registered for VAT, has business stationery, a business bank account and is paid only on invoice.

GUIDANCE AVAILABLE

None of the points listed above is conclusive in itself and professional advice may well be necessary.

The Inland Revenue has published a free leaflet entitled 'Are Your Workers Employed or Self-Employed?' (ref. IR148) which is available from your Tax Office. However, as already indicated, the question is complex and, in the same way as the summary of the points listed above, the Revenue's leaflet (which focuses on the construction industry) is intended to do no more than help clients recognise these complexities, and should be regarded as being no more than a useful introduction to the issues. Substantial reclassification has taken place within the construction industry in respect of labour only sub-contractors following negotiations with that industry.

THE OFFICIAL APPROACH?

In practice, the approach of both the Inland Revenue and the Contributions Agency is to take the view that - if there is doubt, he's an employee! Therefore, careful consideration of the facts of each case is required before conclusions are reached. It should be noted that the fact that a particular worker's status (or the status of a group of workers) has not previously been challenged does not necessarily mean that the status has been formally accepted by the Revenue. It may be challenged during the next PAYE inspection.

We shall be pleased to discuss with clients the status of any worker currently regarded as self-employed. In recent years the arrears of tax and NIC attributable to the reclassification of workers formerly regarded as self-employed runs into millions of pounds. Usually, it is the unfortunate employer who has to foot the bill. Forewarned is forearmed!

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FOR GENERAL INFORMATION ONLY

Please note that this answer is not intended to give specific technical advice and it should not be construed as doing so. It is designed to merely alert clients to some of the issues. It is not intended to give exhaustive coverage of the topic.

Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.

© 2006 - Gordon Leighton.

Gordon Leighton is registered to carry on audit work by the Institute of Chartered Accountants in England and Wales