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HMRC tends to be suspicious of self-employment and often seek to re-categorise a self-employed individual as an employee. If they succeed, the responsibility for the tax and National Insurance on his earnings switches from the individual to the employer.
Such challenges by HMRC can be made up to six years in arrears, by which time the individual may no longer work for the business so in practical terms it may be difficult, if not impossible, to recover the tax and NIC from them. A demand for six years back tax for a number of workers could easily bankrupt a business. That is not to say that employers need to be wary of engaging the self-employed, but rather that they need to be conscious of the tests of employment and they need to be confident that the work they want the individual to perform is capable of fitting within those tests. The current tests of employment were formulated by the courts in the 1960s and have stood the test of time. ‘Employment’ requires three things:
- The worker agrees that in consideration of remuneration, he will provide his own work and skill in the performance of some service for his master;
- He/she agrees, expressly or impliedly that in the performance of the service he/she will be subject to the other’s control in a sufficient degree to make him ‘master’; and
- The other provisions of the contract are consistent with its being a contract of service.
It is important to realise all three need to be satisfied. HMRC tends to look only at control, but control on its own is not sufficient. Virtually every contract incorporates a degree of control. For an employment to exist this has to be the type of control that creates a ‘master/servant’ relationship. Some tips to getting it right may be helpful. Are you buying a person’s labour or the product of their labour? If it is the latter it is unlikely to be an employment; but why not identify the nature of that product and contract to buy that, not the labour? If you have a written contract the starting point is the wording of that contract. HMRC cannot normally go beyond it unless it can show either that the contract has been orally varied or contains sham provisions. If there is no written contract the starting point is what actually happens in practice, so if you do not have a written contract you disadvantage yourself immediately. Do not be swayed by a letter from the individual’s accountant confirming that HMRC regard him or her as self-employed. They certainly will not have asked HMRC if the work that they will do for you is part of their self-employment, and what they do for others is irrelevant to what they do for you. Make up your own mind or ask HMRC for a ruling. Finally, if you considered the nature of the work on day one you are more likely than HMRC to be right, so do not let them browbeat you. Robert Maas is a consultant at CBW Tax. He is also chairman of the ICAEW Tax Faculty’s Enquiries and Appeals Subcommittee and author of Guide to Taxpayers’ Rights and HMRC Powers
One of the UK’s leading tax experts, Robert was awarded the 2013 Lifetime Achievement award at LexisNexis Taxation Awards (which are the gold standard of excellence in the UK tax industry).