Perhaps you have workers who are ‘self-employed’ but carry out work for you, like a sub-contractor. Perhaps your worker provides their service to you through a limited company acting as an intermediary (known as a ‘personal service company’). Or perhaps you are a worker providing services to a company.
The rules on how this is reported and how workers are taxed are about to change and it is important you know what they are so that you are not caught out. Failure to comply could lead to additional tax liabilities and penalties.
We think it is important that we cover a lot of the rules with regards to off-payroll reporting as it is quite complex.
Someone is probably self-employed and shouldn’t be paid through PAYE if most of the following are true:
- They are in business for themselves, are responsible for the success or failure of their business and can make a profit or a loss.
- They can decide what work they do and when, where or how to do it.
- They can hire someone else to do the work.
- They are responsible for fixing any unsatisfactory work in their own time.
- Their ‘employer’ agrees a fixed price for their work – it doesn’t depend on how long the job takes to finish.
- They use their own money to buy business assets, cover running costs, and provide tools and equipment for their work.
- They can work for more than one client.
You can use the Check Employment Status for Tax (CEST) tool by following this link.
You should also be aware that someone could have a different employment status under tax law when compared to employment law (i.e. they may be considered employed for tax purposes but self-employed under employment law meaning they have limited ‘employment’ rights, if any).
Who decides the status?
The decision as to the status of a ‘self-employed’ worker for tax purposes is based on the agreement between the contractor and the worker, but by using the CEST tool you can hopefully avoid any disputes. HMRC will stand by the decision given by the CEST tool (although it may not give you a definitive answer) provided you do not contrive the arrangement to give the result you want, and you ensure all facts are 100% correct when entering the information.
Individuals and their employers may have to pay unpaid tax and penalties, or lose entitlement to benefits if their employment status is wrong. Tests should be carried out at the commencement of each contract with between a company and a ‘self-employed’ individual as each agreement you have or the circumstances could potentially be different.
Personal Service Companies – Where the ‘worker’ provides the service through a limited company
Private Sector – Prior to 6th April 2020
In the Private Sector, the rules currently state that the worker’s intermediary is responsible for deciding if the off-payroll working rules apply. This means that the decision is the worker’s and not the contractor’s.
Private Sector – From 6th April 2020
In the Private Sector, the rules will state that medium and large organisations will need to decide whether the updated rules apply to an engagement with individuals who work through their own company (i.e. the determination is made by the contractor and not the worker). To qualify as a medium or large company, the contractor must meet at least two of the three following criteria:
- 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.
What if the criteria are not met?
If the contractor does not meet the criteria for a medium or large company, the worker may make the determination.
However, in the future, circumstances may change (i.e. the contractor may meet the criteria either through growth or the criteria being reduced or both). Should this occur for two consecutive years, the contractor will then need to start applying the rules from the end of the filing period for the second financial year when they meet the conditions.
And if the criteria are met?
Should the contractor meet the criteria and the worker is deemed to be ‘employed’, then the contractor must treat them as being employed for tax purposes. This means they would need to put the worker through the payroll and process the amount due net of VAT and deduct income tax, employee’s national insurance and pay employer’s national insurance (though they cannot deduct employment allowance) and apprenticeship levy (if applicable).
The contractor would not be responsible for student loan deductions or auto-enrolment. The contractor would then make this payment plus any VAT to the worker’s limited company. The worker’s limited company would then account for these deductions in their company’s accounts and corporation tax return so the correct amount of tax is paid.
It is quite possible that HMRC will eventually extend the IR35 rules to include all organisations in the future. This has been an area of constant review over the last few years, so please keep an eye out for any further legislative changes.
To summarise, we recommend that you use the CEST tool to determine the status of ‘self-employed’ workers and pay them based on that determination, assuming you get a definitive answer. Otherwise, use reasonable care and come to an agreement with the worker as to what their status actually is. If you cannot agree and you think they should be ‘employed’, you can refuse to give them work if they do not accept those conditions. However, they may also refuse to do the work, which could limit your ability to provide a service.
For those workers using a limited company, if the contractor is a small company (i.e. does not meet two of the three above criteria) it is for the worker to determine their status. The CEST tool can be used if the worker wishes to use it.
Where the contractor is a medium or large company, then it is for the contractor to determine the worker’s status. We recommend that the contractor uses the CEST tool to make this determination.