If you’re a UK business or recruitment agency engaging flexible workers, you’ll have to consider the employment status of those workers.
Whether you engage sole traders or limited company contractors, it’s your responsibility to ensure the correct taxes are paid to HMRC, and HMRC isn’t inclined to give up the chase when it comes to unpaid tax.
It all boils down to whether an individual worker is considered employed or self-employed for tax purposes. False self-employment impacts a wide range of businesses engaging limited company contractors, freelancers operating as sole traders, and gig economy workers.
There is good news though! Compliance isn’t as difficult as it looks. Whilst understanding the complex legislation itself can prove tricky, there are some simple steps your business can follow to ensure compliance.
Employment status is the categorisation of workers to decide the worker’s rights, the responsibilities of the employer, and the tax to be deducted.
There are 3 main categories for employment status:
However, for tax purposes only employee and self-employed categories are applicable.
There are also 2 further categories used to further classify a worker based on their roles and responsibilities:
Any UK business which hires or places limited company contractors or sole traders will need to consider employment status.
There are however specific legislations within the umbrella of employment status which will depend on your business and the type of worker you engage:
If your business engages sole traders directly, you’ll need to consider traditional employment status and carry out consistent and fair employment status checks.
Undertake working practice assessments at the start of an engagement, and regularly thereafter
Keep a clear record of any evidence of a worker’s employment status
Maintain robust contracts, processes, and policies around status
Recruitment agencies placing sole traders to end clients will need to consider the Onshore Intermediaries Legislation (Section 44) instead, and will carry the potential tax liability.
HMRC routinely carry out checks into companies who engage contractors and sole traders. This may stem from a routine check, or may be a more targeted approach – the latter being a tactic HMRC have used extensively in recent years.
HMRC’s dedicated Employment Status and Intermediaries Team are tasked with policing the engagers of all flexible workers, covering sole traders, IR35, and Onshore Intermediaries, and will take “all necessary steps” to ensure the right tax is paid.
Once HMRC determine that there’s a case to be answered involving status, they will mount an exhaustive challenge. The defence of such a challenge itself can be extremely time-consuming and costly, with the potential for the case to end up at a tax tribunal.
Given the complexities involved in employment status, we advise engagers to seek specialist representation in the event of any compliance activity from HMRC. We expect to see HMRC turning their sights to traditional employment status now that the off-payroll rules (IR35 reform) have been implemented in the private sector so it’s important to make sure your business has processes in place to determine the employment status of any sole traders you engage.