Are you sure they are self-employed?
The Office of Tax Simplification last year warned: “Employment status is a complex and wide-ranging subject that many have said has no real solution – and that if we did manage to ‘solve it’, we should immediately move on to world peace as we’d clearly be on a roll.”
This is not an area for people to wade into nonchalantly. You need to really understand the law and the tax and legal systems if you want to successfully see off employment status challenges.
Employment status and whether someone is an employee or self-employed has been an area of law subject to much debate dating back over a hundred years. Time has moved forward, while the law remains clear it is HMRC’s interpretation of it that results in companies still having no absolute certainty over an aspect of their business which could potentially destroy them.
Given the serious and very real nature of the threat to businesses who rely on self-employed, agency supplied or contract workers, we advise firms to make it a priority to fully review how they engage their workforce.This includes looking in detail at the employment conditions and circumstances of all workers they pay.
Expert guidance is needed, as employment status could be judged differently depending on circumstances on a case-by-case basis.
How does HMRC define “self employment”?
Under the new legislation the only factor HMRC need to consider is whether there is the right by anyone to supervise, direct or control the manner in which the individual provides the services, and HMRC and the tribunal will assume there is this level of control until proven otherwise by the taxpayer. These changes mean it is now much simpler for HMRC to bring an employment status challenge.
Employment status is determined by looking at the facts of how an individual is engaged and then applying case law to those facts to reach an outcome. The problem is that there are hundreds of cases and judgments to consider and each judge will consider and apply them in a slightly different way meaning no matter how confident someone can be, a successful outcome can never be guaranteed.
Government guidance says someone is “probably an employee” if “most of” its 14 specific statements are true. These include not being able to send someone else to do their work; being eligible to join a business’s pension scheme; and only working for one business in that particular line of work.
Judgements of past employment status challenge tribunals
This grey area has traditionally allowed companies to construct arguments that a worker they pay is not an employee by focusing on select points from the long list. Note that the firm should not necessarily have to establish that the worker is self-employed, just that it does not employ the individual. A landmark ruling was made in 1967 by Lord Justice MacKenna in the case of Ready Mixed Concrete (South East) vs the minister of pensions and national insurance. The company successfully overturned a decision that it should treat a delivery driver as employed.Lord MacKenna said in his ruling: “If the provisions of the contract as a whole are inconsistent with its being a contract of service, it will be some other kind of contract, and the person doing the work will not be a servant. The judge’s task is to classify the contract… he may, in performing it, take into account other matters besides control.”
What this ruling is saying in practical terms is that if the contract has features which are contradictory to an employment contract then the worker will not be counted as an employee. Control is an important factor to consider, but it isn’t the only factor.
It is difficult to imagine a working relationship where someone paying for work is unable to in some way direct or supervise it. Although many skilled trades or providers of specialist services would scope their own jobs, this may not be a watertight defence.
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Example of “Right to Control”
Example: If an electrician is brought in to a building project to a job then he won’t need to be told how to do it. But it is about the ‘right’ to control. Perhaps the main contractor could tell the electrician how to do the work. The way the legislation is worded means it could arguably be applied in a huge range of situations..
This is a critical element with the new legislation but it is practically untested and HRMC will be looking to establish case law in their favour.
This one of the reasons businesses should treat undertaking a compliance review as a matter of urgency. While people are expecting well-known firms to be high priority targets for HMRC, the reality may in fact be completely the reverse of this. Smaller firms are likelier to be easier targets in this regard, not having the resources or internal legal expertise to be able to fight long, drawn-out cases.
The Office of Tax Simplification even carried out a thorough review of employment status and how the problem can be addressed but even after spending a great deal of time analysing the issue they ultimately were not able to come up with a solution on how it can be adequately dealt with.
This would not be such a problem if it were not for the significant liabilities and penalties that apply. The fact is companies could face crippling liabilities for a complicated area of law they may well have done their best to address.
RIFT Legal Services looks to address this imbalance and enable companies to engage self-employed people with confidence and safe in the knowledge that should they get an enquiry, RIFT will deal with HMRC and more importantly pay the National Insurance liabilities should we be unable to successfully defend the position.
How can I prove my workers are classifed correctly?
Keeping records of your classification process and the reasons for all worker status assignments as a living document is vital. If a company can demonstrate it has taken the time to consider this area before an enquiry starts, that enquiry will invariably be concluded more quickly, saving the company time, money, stress and reputation.
The key to surviving the renewed challenge to employment status is to make sure you are confident about the reasons you do not count workers as employees. However, just doing the same thing as another organisation because it was found to be compliant by HMRC does not mean that yours will be. The situation of your organisation and your workers will be different from theirs and needs its own review.
How should I treat workers who wish to continue to be self employed?
Unfortunately there seems to be have been very little consideration of the impact on people who are genuinely self-employed and wish to stay that way for a wide variety of reasons. Employers often hire the self-employed for projects that need the flexibility they can provide. If organisations become wary of doing this due to a fear of employment status challenges, we could see much wider economic and social effects.
Once a business employs people, it loses some of the flexibility to engage and disengage them as a project ebbs and flows. There will also be a negative impact on individuals who wish to work on a contract-by-contract basis as it better suits their circumstances. If companies become reluctant to engage workers in this way then they will find it increasingly difficult to find work.
Here at RIFT Legal Services we believe it is important for the industry to defend its position.It is harder to win cases now, but there is still scope to be self-employed in construction and it is importan for the sector to stand firm and prove those cases at tribunal to make the law clearer. The term ‘false self-employment’ should be abandoned as it is not helpful. An individual can work in a variety of ways and just because they may not be a fully fledged business in their own right does not mean that they are an employee.
The construction industry contains about one in six of the UK’s self-employed, and these are all on a neatly contained list at HMRC due to the Construction Industry Scheme.There is also an active, interested and growing trade union presence inthe sector.
In October UCATT, the trade union for the construction industry, wrote to Ms Ellison calling for HMRC to investigate construction firms. The union’s acting general secretary Brian Rye said: “If the government’s commitment to force companies to properly comply with rules on employment status is genuine, then construction must be a key priority.”
HMRC has long looked for false self-employment within construction, and there is every reason to expect this to intensify in the current climate.
As well as having a huge motivation to probe employment practices in the industry, the tax authority also has increased its means, both in terms of its own resources and with critical changes to legislation.
How will the change to employment classification impact the industry?
A report by Cranfield School of Management professor Andrew Burke found that freelancers created six forms of economic value in the construction sector, including reducing the upfront cost of projects, keeping build prices down and boosting competition. “Industry executives in our case study analysis highlighted that the industry business model relies on the ability of firms to use freelancers,” the report said.
A further risk is that companies have to increase their prices after employing more workers directly, making them less competitive and reducing their chances of winning work, opening a vicious circle that will ultimately end with even more people out of work.
A further risk is that companies have to increase their prices after employing more workers directly, making them less competitive and reducing their chances of winning work, opening a vicious circle that will ultimately end with even more people out of work.
Construction plays a crucial role in the UK economy and was put at the heart of the country’s recovery drive by former chancellor George Osborne, with his “we are the builders” mantra.
The construction industry is dependent on self-employment. Stripping that away could bring the sector to its knees and have a huge knock-on effect. While HMRC and the government are keen to recoup what they perceive as ‘missing’ revenue, they need to weigh that against the potential threats of doing significant damage to the sector as a whole.