Off-payroll workers – the rules

The status of an individual is crucially important in an employment context. The majority of workers will be employees whilst some will be self-employed.  Somewhere in the middle is the category known as a “worker”, who doesn’t have as many rights and protections as an employee but who enjoys more protections than the self-employed.  

The status of employees and workers will also affect the tax treatment of their earnings.

Employed or Self-Employed?

The first thing to look at is whether a person is under a contract of employment or whether they are engaged under a contract for services.

The legal rights enjoyed by employees and the self-employed differ in many ways. For example, an employee will enjoy many statutory employment protection rights, such as the right not to be unfairly dismissed and the right to receive a redundancy payment if they meet the necessary qualifying requirements, but a self-employed person will not.

The question of whether a person is employed or self-employed is determined by reference to the contract under which they work. The distinction between a contract of service and a contract for services has generated much litigation and differing approaches by the courts over the years. 

As a result, many tests have developed over the years, including the personal service test, the control test, the organisational test and the economic reality test.

To create a contract of employment the following factors must be present:

  • Mutuality of obligations (an obligation to pay a wage in return for an obligation to work);
  • An express or implied agreement that performance of the service would be the subject of the control of the party employing; and
  • The other provisions of the contract are consistent with it being a contract of employment.

However, these are just part of the factors in consideration.  In every case it is necessary to weigh up all the factors and ask whether it is appropriate to call the worker an employee or self-employed. 

CEST

To support the roll-out of IR35 in the public sector, HMRC developed a Check Employment Status Tool (CEST), which is currently being reviewed and updated for the proposed IR35 in the private sector role out from April 2020. This tool does not always give the same result as application of relevant case law would return. Therefore, although CEST should be used, an understanding of the tax case law is also important in assessing status.

Do’s and Don’t’s

  1. Check if you are caught – small businesses need not apply the rules
  2. Find out who works for you off-payroll – are personal or composite services supplied?
  3. Ask the questions – undertake an employed v self-employed assessment of each personal services arrangement using established case law
  4. Know the right responses – having evaluated using case law run the answers through the HMRC Check Employment Status Tool (CEST)
  5. Review the results – who does CEST say are employed (within IR35), self-employed or undetermined?
  6. Get in to the detail – look at those that are within IR35 or undetermined to see if there are any processes that need clarifying or changing
  7. Do the maths – calculate the potential impact of moving those within IR35 on to the ‘payroll’ for tax / NIC and apprenticeship levy
  8. Move in the right direction – for those that will be within IR35 start moving contracts and payment dates ASAP to some ‘standard’ dates and arrangements to make the admin easier
  9. Get set up – establish as soon as possible how you will run the ‘payroll’ for those within IR35 so you are ready to fulfil your new compliance responsibilities
  10. It’s good to talk – don’t leave it too late, ensure you clearly and regularly communicate throughout the ‘process’ with all internal and external stakeholders to minimise ‘nasty surprises’

Contact us

If you have any questions regarding the tax implications of staff entertainment, please contact Clair Williams (clair.williams@taitwalker.co.uk) or Rachael Matthewson (rachael.matthewson@taitwalker.co.uk) via email or call 0191 285 0321.