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Self-Employed or Employees? A costly mistake for Companies

Many companies that use self-employed contractors may have one or two for whom they are the only client. We come across the situation where the contractor works five days a week for the same company and has done so for years in some cases, he has no other clients, uses the company’s tools and equipment and with a high ‘retainer’ charge even though the contractor has no office of his own to maintain or any overheads. It can be a profitable arrangement for employers because they don’t have the costs of statutory rights and don’t have to pay NICs.

For some time now questions about the employment status of such workers, has been assessed looking at a variety of things; mutuality of obligation, financial risk, control and whether the worker has to deliver the work in person or whether he can send a substitute.

HMRC are on the war path for any unpaid National Insurance or other tax, and may well decide to look deeply into a company’s records to discover the reality of a situation. If the self-employment is a fiction, tax can be recovered for up to six years’ arrears. Companies need to be extra careful, as even legitimate company-contractor relationships may be under threat with new proposed rules. Instead of the usual ‘Multiple’ tests, the government is proposing a supposedly simpler test whereby if individual contractors are not already subject to PAYE and are under anyone's ‘supervision, direction or control’, the company responsible for supplying them will also become responsible for deducting tax and NI from their pay.

Simpler though it may be to identify some employees, the Employment Lawyers Association has pointed out that there can be so many different parties in a long contractual chain between clients and different employment businesses who could be involved in exercising ‘direction, supervision or control’ over otherwise self-employed individuals. Potentially, any of those parties could be liable to operate PAYE, even though others in the chain have more direct involvement with the individual’s work.

These things never are simple in reality. The description ‘direction, supervision or control’ is very appears so broad and could include almost any request or instruction for the worker to do something. The proposals make a presumption that workers are under supervision or direction unless there is a contrary indicator. So many workers who have historically been treated as self-employed will now be seen as employees for tax purposes if they are supplied through a third party though not if they are directly appointed.

Quite how these proposed rules will actually work remains to be seen. However HMRC will not wait until that date to crack down on employers potentially fiddling the current system. The power to demand up to six years in unpaid NI contributions could potentially break a small business.

Employers therefore need to get things sorted themselves. Have you got any so-called ‘self-employed contractors’ who work only for you but who really aren’t self-employed? If so, it may well be time to start negotiating to bring them on board as an employee if you still need them. They will make a loss in the short-term with NIC and tax, however in the longer term they may well be better off with sick pay, holiday, a guaranteed salary possibly with bonuses, and all the other benefits that come with being an employee. This is the conversation to have, combined with the fact that it is the law. Most people who rely solely on you for their income will not simply walk away. As long as it is made clear that a change in your business’ circumstances has led to guaranteed provision of work for this person, legally it will be perfectly proper to bring them from self-employed to employed status.

Russell HR Consulting provides expert knowledge in HR solutions, employment law training and HR tools and resources to businesses across the UK.

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