As a business owner or manager, there will be times when you need to engage temporary help to enable you to cover absence or a vacancy, manage peaks and troughs in activity or to engage highly specialist skills/experience (usually referred to as Contractors or Freelancers).
You can hire a temporary worker in a number of ways:
- A zero-hours/casual contract, where you pay for the hours worked – often used where the need is variable and ad-hoc.
- A Fixed Term Contact – similar to a permanent contract except the contract remains in force only for a specific period of time to complete a specific objective i.e., to cover Maternity leave, to fill a vacancy or to complete a project. These contracts are often best used for periods of 18 months or less.
- Via an Agency – You transact with the agency, and they directly pay the worker. An agency assignment will become subject to Agency Worker Regulations after a period of 12 weeks.
- Hiring an expert via a “contract for services”. The contractor or freelancer may be self-employed or work via their own limited company. When you hire a contractor/freelancer, you should be mindful of IR35 and HMRC rules for determining whether you are responsible for payment of the contractor/freelancer’s Tax and National Insurance Contributions.
HMRC require the Hirer to demonstrate reasonable care when reviewing the status of contractors and freelancers. In order to demonstrate reasonable care has been taken when assessing the status of employment for tax it is important to be able to evidence:
- The nature of the role being undertaken.
- How the role is being undertaken
- The contract under which the work is being undertaken, “contract for services”, to include:
• employment status for the assignment
• who is responsible for making payment of tax and NICs to HMRC
- that this evidence is retained for at least 6 years.
It is permitted to apply “blanket application” of an IR35/Employment Status check by role as long as the status determination check (SDS) is provided to the contractor and their intermediary before the contractor commences work and you have provided the right of appeal. It is important each role is understood in its own right though – the Hirer cannot apply the same status determination to different roles.
IR35 applies to all incorporated organisations that meet the criteria below (and unincorporated bodies who satisfy one of the criteria for 2 accounting periods).
- Turnover > £10.2m
- Balance sheet total > £5.1m
- Number of employees: 50 or more
HMRC introduced IR35 (also often referred to as ‘off-payroll working rules’/intermediaries’ legislation) to tackle what it calls ‘disguised’ employment. IR35 assesses whether contractors are (for all intents and purposes) employees when they take on work for clients. HMRC is particularly concerned with contractors operating via limited companies acting as a Personal Service Company (PSC) i.e., where the company is small in nature and provides services rather than goods, such as “consultant” roles. If an assignment is deemed ‘inside IR35,’ HMRC may deem the individual an employee and believe that the individual should be taxed accordingly via the hiring company. The Hirer is then responsible for deducting tax and national insurance at source for these contractors and paying this over to HMRC.
With effect from 6 April 2021, the legislation was extended to medium and large organisations within the private sector and requires the Hirer to produce a Status Determination Statement, before the contractor/freelancer starts work. The Contractor also has the right to appeal a determination and receive a response from the Hirer within 45 days.
In terms of risk to an organisation, if HMRC believe you have failed to pay the tax due in relation to a contractor subject to IR35, liability for any outstanding amount of tax will shift back to the Hirer and a penalty may be applied.
IR35 status depends on some key tests which are utilised to work out whether a contractor is deemed an employee for the purpose of taxation. HMRC has a tool Hirers can use to check whether IR35 applies to a contract (CEST, or the ‘check employment status for tax’ tool), and a helpline.
IR35 status ultimately falls to case law and employment legislation and is reliant on employment test cases heard in the UK courts. HMRC do commit to standing by the determination its CEST tool provides, as long as the tool has been completed honestly and in the spirit of the legislation. The HMRC test can be accessed via this link – Check employment status for tax – GOV.UK (www.gov.uk).
Hirers must review the IR35 status of each individual operating via a limited company in the event the role they are being asked to undertake changes or their assignment is extended – this may be once annually in the case of ongoing arrangements such as guest lecturers.
Self-Employment status for the purposes of tax
Where an individual indicates they are self-employed but are not paid via an intermediary (i.e. operates as an individual but not via a limited company, partnership or unincorporated association), it is important to establish that the individual is considered self-employed for the purposes of employment as this will determine whether the individual has an employee’s rights such as entitlement to national minimum wage, sick pay, holiday pay, pension etc. the risk of getting this determination wrong can mean would be required to back-pay any benefits which should have been available to the individual for the duration of their assignment and potentially going back as far as 6 years.
The employment status check can be undertaken by completing an HMRC CEST Check – What do you want to find out? – About you and the work – Check employment status for tax – GOV.UK
There are three recognised status when considering employment status:
2. Worker – The status of ‘worker’ does not exist for tax purposes, only employment law purposes.
i. worker – can be employed via a casual contract.
ii. dependant worker – may be self-employed (but not via an intermediary)
i. self-employed in own right
ii. or via an intermediary – limited company, partnership, or unincorporated association
The Hirer needs to establish whether self-employed individuals have some rights under employment law such as entitlement to the national minimum wage, other benefits, and some employment protection which those who are genuinely self-employed for both tax and employment law purposes do not have. Is the individual self-employed or a worker?
It may not always be clear whether the worker is an employee of the Organisation or self-employed. The Organisation and the worker cannot simply agree that the worker is self-employed because this is advantageous to both of them — the underlying relationship and contractual arrangements must support this.
An individual is probably self-employed and doesn’t have the rights of an employee if they’re exempt from PAYE and most of the following are also true:
- they put in bids or give quotes to get work.
- they’re not under direct supervision when working.
- they submit invoices for the work they’ve done.
- they’re responsible for paying their own National Insurance and tax
- they don’t get holiday or sick pay when they’re not working.
- they operate under a contract (sometimes known as a ‘contract for services’ or ‘consultancy agreement’) that uses terms like ‘self-employed’, ‘consultant’ or an ‘independent contractor’.
If a contractor lives and/or works abroad
The IR35 regulations may apply where a contractor lives and or works abroad. This will depend upon whether the contractor lives outside of the UK, whether their company is registered in the UK and where the work is physically undertaken. In addition to this, there may be implications for the worker if they are working remotely from another country in terms of taxation within the country they are working from. It is recommended that you seek advice in these circumstances.
HR Wise provides an employee handbook and employment contracts (incorporating a statement of particulars). They are regularly updated by an industry expert, so you don’t have to worry about keeping on top of things. If you use our handbook and employment contracts, we help you navigate potential TUPE situations.
Contains public sector information licensed under the Open Government Licence v3.0.