Employment Status & IR35
You may have noticed in the news a lot of discussion around employment status and whether people are workers or employees and so on. Employment status can be complex and you may need to ask for help, to make sure you are handling tax and other obligations correctly.
For most people, their employment status will be clear from when you enter into a contract or other arrangement with them, but sometimes it is not so clear. Some examples of employment types are:
- Agency worker
- Self-employed / contractor / freelancer
- Zero hours or Casual Worker
See below for explanations of these terms.
The status, and therefore each party’s legal rights and responsibilities, should be agreed from the outset of the arrangement to avoid any uncertainty. You can have different types of arrangements with different people to suit your different needs, but be careful to ensure equal and fair treatment.
The difficulty can come when the way things work in practice does not reflect the arrangement you have agreed on paper. For example, you may think you have some self-employed contractors working with you, but the HMRC or an Employment Tribunal may see them as employees (or workers), if they are not really independent in practice. The types of things they will take into account are:
- Which party decides on the work and when and how it is done?
- Can the individual turn down the work or are they obliged to carry it out?
- Can they send another person to do the work if they are not available?
- What is the individual’s involvement in the business in terms of responsibility, requirement to attend meetings, make decisions, setting terms and conditions for others and receiving contractual benefits?
- Does the person run their business as a business, with published accounts etc.?
- Does the individual have to invoice the business, provide their own equipment, bear any financial risk or have responsibility for any losses to the company?
- The intentions of the parties.
If you have heard about IR35, the following paragraphs explain the recent and coming changes. Simply put, HMRC are tightening up on getting income tax and national insurance where people have been classifying themselves as not employed, but the HMRC considers they should pay tax and NI as employees do.
Understanding off-payroll working (IR35)
The off-payroll working rules
The off-payroll working rules (sometimes known as IR35) can apply if a worker provides their services through an intermediary, which usually will be the worker’s own personal service company. They could also be a partnership, a managed service company, or an individual.
The rules make sure that workers who would have been an employee if they were providing their services directly to the client pay broadly the same tax and National Insurance contributions as employees.
You may be affected by these rules if you are a client who receives services from a worker through their intermediary. If the rules apply, tax and National Insurance contributions must be deducted from fees and paid to HMRC.
You can use the Check employment status for tax service to help you decide if the off-payroll working rules apply.
Currently it is the client’s responsibility to decide employment status if they are in the public sector. If the client is in the private sector, it’s the intermediary’s responsibility to decide employment status for each contract.
From April 2021
From April 2021, the way the rules are applied will change. All medium and large private sector clients will also be responsible for deciding if the rules apply.
If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.
The rules will apply to all public sector clients and private sector companies that meet 2 or more of the following conditions:
- you have an annual turnover of more than £10.2 million
- you have a balance sheet total of more than £5.1 million
- you have more than 50 employees
A simplified test also applies to some clients and considers annual turnover. You must apply the rules if you have an annual turnover of more than £10.2 million and are not:
- a company
- a limited liability partnership
- an unregistered company
- an overseas company
There are also rules which cover connected and associated companies. If the parent of a group is medium or large, their subsidiaries will also have to apply the off-payroll working rules.
When you need to start applying the rules
Public sector clients must continue to apply the rules when the changes come into force on April 2021. However, from this date there are extra responsibilities that will affect you.
Private sector clients: If you meet the conditions above you must start applying the rules when the changes come into force in April 2021.
What you need to do as a client
You’ll need to decide the employment status of a worker, you must do this for every contract you agree with an agency or worker. You’ll need to:
- pass your determination and the reasons for the determination (the determination statement) to the worker and the person or organisation you contract with
- make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid
- have processes in place to deal with any disagreements that arise from your determination
If you are also the fee-payer, and the off-payroll working rules apply, you will need to deduct and pay tax and National Insurance contributions to HMRC.
You will hold the liability for tax and National Insurance contributions until you tell the worker, and the person you contract with, of your determination and the reasons for it.
Small-sized clients in the private sector will not have to decide the employment status of their workers. This will remain the responsibility of the worker’s intermediary.
Taking reasonable care when making a determination
You must take reasonable care when you make a determination about the employment status of a worker.
Failure to do so will result in the worker’s tax and National Insurance contributions becoming your responsibility.
What to do if a worker or deemed employer disagrees with your determination
A worker or the agency paying the worker’s intermediary may disagree with the employment status determination you reached.
If this happens you will need to:
- consider the reasons for disagreeing given to you by the worker or agency paying their intermediary
- decide whether to maintain the determination if you feel it is correct and give reasons why – or provide a new the determination because you feel it was wrong
- keep a record of your determinations and the reasons for them, as well as records of representations made to you
You must provide a response within 45 days of receiving notification that the worker or agency disagrees with your employment status determination. During this time you should continue to apply the rules in line with your original determination.
Tell the worker if the determination has not changed.
Tell the fee-payer and the worker if the determination has changed.
Failure to respond within 45 days will result in the worker’s tax and National Insurance contributions becoming your responsibility.
How to prepare
- Look at your current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through personal service companies.
- Determine whether the off-payroll rules apply for any contracts that will extend beyond April 2021. You can use HMRC’s Check employment status for tax service to do this.
- Start talking to your contractors about whether the off-payroll rules will apply to their role.
- Put processes in place to determine whether the off-payroll rules will apply to future engagements. These might include who in your organisation should make a determination and how payments will be made to contractors within the off-payroll rules.
What the different working arrangements mean
It will be clear who your directors are, since they will be named on the Companies House website, but complications can come because directors may also be employees.
There is no one simple, clear definition of an employee, but it is defined in the Employment Rights Act 1996 as “someone who works under a contract of employment”, where employment means service or apprenticeship”. The Transfer of Undertakings Regulations (TUPE) says it is “someone who works for another person whether under a contract of service or apprenticeship or otherwise, but does not include anyone who provides services under a contract for services”.
Employees have the most protection in law, but also must pay tax and national insurance as employees.
There are different types of apprentice legally: most are employees, but there may be some who are on apprenticeship contracts, who have extra protections, such as protection from dismissal.
Interns are individuals who are there to gain work experience. They may be unpaid only if they are students doing the internship from school or as part of a university course; or if they are not doing work, merely shadowing to gain experience. The Government currently is considering making all internships paid, since as things are they benefit people who can afford to be unpaid.
Volunteers are unpaid. Be careful here because only not-for-profit organisations can have volunteers and if a for-profit organisation has anyone who is doing actual work, they must be paid the National Minimum Wage or National Living Wage, depending on their age.
An agency worker is someone you employ through another company or an agency. It is important to separate these from your employees and do not treat them all in the same way, for example agency workers should be managed by the company that employs them, so any appraisals or disciplinaries etc. should be managed by the agency. If you give them bonuses and treat them in the same way as employees, they may become employees, especially if they are with you for a long time.
Agency workers are protected from discrimination by you or your employees under the Equality Act.
Also note: after 12 weeks in the same role, agency workers are entitled to the same pay as employees doing that role.
For someone to be truly self-employed, they must be in business for themselves. If you are treating them like employees: deciding their hours, how and where they do their work and they are part of your structure, they are likely to be seen as an employee in reality.
It is more likely they will be seen as self-employed if they have other clients; they have an objective, but they decide how, when and where they will achieve it; they can say no to work and you are not committed to keep providing them with work; they can send someone in their place if they are not available.
“Workers” is a broad category (that includes employees), with a worker being an individual who has entered into a contract to do work personally for any party to the contract who is not a client or a customer of the individual’s business. Workers who are not employees still have some legal protections, including some under the National Minimum wage legislation, the Equality Act and the Working Time Regulations.
Zero hours or Casual Worker
A zero hours contract is just a specific form of casual contract (where the worker has no fixed hours, but works when needed). This is not an employment status, since casual workers can be employees or workers, depending on the details of arrangements and written contracts.