Employment status is used as a process of categorisation for two distinctly different purposes; to indicate what rights that individual is eligible to, and how much tax that individual is subject to.
It’s important to note that the categorisation framework for the purpose of rights and tax is not aligned. In other words, the categories used to determine employment rights and the categories used to determine tax liability are not equal.
An individual providing services under a contract of employment, also known as a contract of service.
More specifically, an employee is an individual that is contractually obligated to provide services personally. In other words, as part of their contract, an employee is consistently offered and obligated to accept work whilst under the supervision and control of their employer.
Example: A teacher working a regular 9-5 under a contract of service.
Viewed as somewhat of a middle-ground between employment and self-employment.
In reality, a worker is an individual that provides services on a casual basis (i.e. with no obligation to be offered nor to accept work) usually to a single business, and must provide those services personally. These services are not provided as a representative of a limited company but as an individual.
Example: Anyone working on a zero-hours contract or a “gig economy” worker such as an Uber driver.
An individual who runs their own business (as a sole trader or limited company) and must take full accountability for the successes or failures of that business might be considered self-employed or a contractor.
Those who are self-employed are responsible for how and when the services of their business are provided, invoice for their payment rather than being paid through PAYE, have autonomy over the services provided, and can hire someone else to do the work on their behalf.
Example: An individual providing freelance graphic design services to multiple clients.
In addition to the previously outlined three main types of employment status, there are two further categorisations which alter how a worker may be treated for tax and employment rights. These relate to the roles and responsibilities of the individual and so the individual may be both one of the below categories and one of the above.
A director is an individual that is legally responsible for the running of a company. Duties that usually befall a director are ensuring the correct filing of accounts and tax returns, the keeping of company records and reporting of changes, and the payment of corporation tax, among other responsibilities.
In this context, we are not talking about a limited company contractor who is also a director of their own limited company.
An office holder is an individual appointed to a substantive position by a company or organisation. They tend to have minimal duties within the company and do not receive any form of payment for the duties performed other than a potential voluntary payment (honorarium) subject to tax and national insurance. They can however also be an employee of the company for which they receive payment.
An individual acting as an office holder works independently and is under no contract in relation to the duties they undertake as an office holder. An example of an office holder might be a trustee, trade union secretary, or company director.
Which status rules apply to the workers you engage and how to steer clear of false self-employment.
The Agency Legislation was introduced to combat the perceived problem of false self-employment created by employment intermediaries.
CIS is not an indication of employment status, which should still be assessed.
When it comes to employment status, there is a disparity between the categories used to determine an individual’s tax liabilities, and the categories used to determine an individual’s employment rights. This can result in the same individual being taxed under one category but given the rights of another.
A common example is a limited company contractor operating “inside” the IR35 legislation which is a measure strictly in relation to tax liability. Such individuals pay tax like an employee but are not automatically awarded the same employment rights.
Because status for tax and status for rights are dealt with by separate government departments, they have different methods of determination for each.
The categorisation of individuals under employment status for tax serves as an indication to HMRC as to how much tax and National Insurance contributions should be deducted from each person based upon the position they fulfil, or the services provided.
For employment status for tax purposes, there are only two categories an individual may be classified as:
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