How to determine status and what if I get it wrong

Determining employment status is getting ever more complicated. 

Not only do you have to consider employment status differently for tax and legal aspects, we now have the concept of deemed employment without any legal rights to consider.  

The House of Commons report (Tax After Coronavirus) states:

“We strongly believe that a major reform of the tax treatment of the self-employed and employees is long overdue. The current system is confused, unfair and unsustainable…. It should look as far as is possible to eliminate the so-called ‘three-person problem’ altogether.” 

• This follows a damning House of Lords report into IR35 published in April 2020 which provided the below comments in its conclusion:
• The tax system needs to adapt to significant labour market changes
• Off-payroll rules build on a flawed system – IR35
• HMRC is imposing a heavy burden on businesses by requiring them to determine status using a complex, fact-specific test. We agree with our witnesses that the support offered by HMRC in determining status – and the CEST tool in particular – falls well short of what is required. 

So how do businesses determine status?

Status is not defined in legislation and is determined based on various tests that have been developed through case law. For each contractor, a picture needs to be painted considering the working relationship as a whole. 
When looking at employment status, it’s important to consider:

• Is there mutuality of obligations between the parties? Mutuality of obligations looks at the nature of the contract between the parties and looks at whether there is a requirement for services/work to be performed personally and for the engaging party to pay for those services. See our analysis of the PGMOL case here.
• Is personal service required? If the worker has an unfettered right to use a substitute or his own employees to carry out the engagement, then the contract will not be one of personal service and the employment service tests do not need to be considered further. If there is a clause in the contract but a substitute would not be accepted, employment status would need to be considered. 
• How much control is exercised in this contract and is there a right of control for the employing vehicle? Here it is important to consider what the individual is doing, whether you can move them on to different tasks without altering the nature of the engagement, how they are working, where they are working and when they are working. The more control that is exercised over the individual (or if you have the right to exercise this control), the more this would point towards an employment relationship.
• Is the individual worker engaged in business on their own account? Finally, it is necessary to look at whether the individual is able to contract with other parties and is actively looking for other work, whether they may be able to make a loss from the contract (i.e. if they have to incur significant expenditure) and how integrated they are into your workforce.

Obviously, there are more factors to consider but these are the ones we see most regularly. 

What can you use to help you determine status?

There are various tools that you can use but it would be worth becoming familiar with the Badges of Trade (tests referred to above). 

Professional advisors (from a tax and legal perspective) can help you to understand these and can also help you with complex cases. 

We offer a service using local solicitors that can help look at cases from both angles.

You can also use the Check Employment Status for Tax (CEST) tool. The link to this can be found here.

It is important to bear in mind that this tool is only believed (by HMRC) to be accurate in about 80% of cases. The tool needs to be completed in line with the Employment Status manual and this guidance can be found here. You can also find a summary of cases (from HMRC’s perspective) here.

What would happen if HMRC had a different viewpoint?

In this situation, the discussion with HMRC would fundamentally be based on how the Badges of Trade have been interpreted. There is much case law in this area and some of it can appear contradictory. 

When looking at disagreements with status, the first step would be to consider if there is any similar case law that would support your argument. 
If HMRC do not accept this, the only recourse is the Tribunals although you could initially try Alternative Dispute Resolution (ADR). Our blog on this can be found here.

What happens if my status conclusion is incorrect?

If you incorrectly treat an individual as self-employed and the tests actually indicate they should be an employee, it is possible for HMRC to look back at the historic relationship between the engaging company and the worker. 

For tax purposes, HMRC is limited to four years where reasonable care has been taken, six years where the decision has been careless and 20 years where it is deliberate. For national insurance purposes, the look back would six years in all cases. 

The unpaid “employee” tax and national insurance would be collected from the company. This would become a taxable benefit in the year that this amount is paid and therefore additional tax and national insurance would be due on this benefit also. 

So, if a worker had a liability of £50,000 and the company paid this on their behalf, the company would end up paying just over £86,200 in employee tax and national insurance and just under £11,900 of employer national insurance. This is almost double the amount of tax due!

There would also be penalties and interest due on this. The penalties are currently behavioural based and so can be mitigated for disclosure and cooperation; however, the interest charge can be significant.

If you have any questions regarding any of the above, please contact your normal Bishop Fleming contact or a member of the Employer Solutions team. 

Further information

For more information on employer issues check out our Employer Solutions Knowledge Hub.