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Employment Status

Engaging flexible workers? Compliance with tax legislation shouldn’t be rocket science.
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Employment status made simple

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.

 

 

What is employment status?

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:

  1. Worker
  2. Employee
  3. Self-employed and contractor

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:

  1. Office-holder (fulfilling an appointed position within an end client’s company)
  2. Director (a board member that oversees business affairs)

Read more about the different categories of employment status



Who needs to consider employment status?

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:

 

Tradesman smiling holding drill

Engaging sole traders

If your business engages sole traders directly, you’ll need to consider traditional employment status and  carry out consistent and fair employment status checks.

  1. Undertake working practice assessments at the start of an engagement, and regularly thereafter

  2. Keep a clear record of any evidence of a worker’s employment status

  3. 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.

Contractor smiling

Engaging contractors

If your business engages contractors, as the client or recruitment agency, you’ll need to consider the IR35 legislation. More specifically, the off-payroll working rules.

If however, you hire or place contractors via an umbrella company or via agency PAYE, the worker will be considered an employee and status doesn’t need to be considered.

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The risks of employment status - why does it matter?

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.

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From audits and consultancy to training and insurance policies, we can support your business whether hiring sole traders or contractors. Book a no-obligation discovery call with our team.
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Frequently Asked Questions

Employment status for tax categorises a worker to indicate how much income tax and National Insurance should be deducted from that worker.

Employment status for rights categorises a worker to determine the employment rights that are applicable to them, such as holiday and sick pay.

Despite being two sides to the same coin, the rules for employment status for tax and employment rights aren’t aligned. In 2017, the Taylor Review of Modern Working Practices proposed alignment of these frameworks but as yet, there has been little headway. This means that a contractor, for example, could pay the same tax as an employee (if employed for tax purposes under the IR35 legislation) but still not be automatically entitled to any employment benefits.

IR35 can be considered a subcategory of employment status.

Whilst employment status should be considered for all workers including sole traders and gig economy workers, IR35 is a piece of UK tax legislation which specifically looks at the employment status for tax of personal service companies (limited company contractors).

IR35 was introduced to close a loophole in the tax system which enabled personal service companies (PSCs) to avoid the issues of employment status for tax, and has become more widely known than general employment status or false self-employment thanks to its easy-to-remember moniker and specificity.

Employment status however casts a much wider net and means a larger threat to the industry whilst it’s so often overlooked.

The Construction Industry Scheme (CIS) is a HMRC scheme that regulates tax receipts by forcing deductions at source. Sole traders can register for CIS if they’re providing services to a contractor (in this context, a ‘contractor’ refers to a construction company).

The guidance says that the scheme applies to workers who are self-employed under the terms of their contract and construction companies must assess employment status of the subcontractor when they first engage them.

Many in the construction industry have misinterpreted the scheme’s guidance that fulfilling their CIS obligations will also fulfil their responsibilities when it comes to employment status.

CIS registration does not mean that a worker is self-employed for tax purposes. No material investigation into employment status is taken as part of the CIS registration process and so can’t be a definitive indicator.

Construction companies engaging subcontractors can retain a potentially significant liability if not assessed correctly. As construction makes up the largest single population of self-employed workers, it’s likely that the industry may well become one of HMRC’s biggest targets.

Find out more about CIS and employment status.

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