We see many businesses and the question of whether someone is either employed or self employed comes up quite a lot, either when employing ‘help’ or for the person themselves. It can be a complex area!
Why is this an issue?
There is a lot at stake for both sides. The ’employer’ has legal obligations for employees, including sick pay, holidays, and the whole issue of discrimination law. They may even have to register as an employer. If the person is self employed, they don’t have to worry about this. It is easier and more flexible to have an ’employee’ classed as self employed – if the work isn’t there, you can simply dispense with their services. Financially, the ’employer’ avoids paying employers national insurance, currently 13.8% of earnings over £144 p/w.
From the ’employees’ side, it can also be more flexible. They may even decide not to declare their income and evade tax (I cannot believe I just typed that!).
There is a perception that this kind of activity happens a lot with small businesses, fuelled by ‘cash in hand’ kinds of arrangements, although it is also common in larger organisations in certain industries, such as construction and security.
As you may imagine, HM Revenue and Customs (HMRC) would prefer to treat everyone as employees, meaning that they would receive the employers NI. Also, it avoids the scenario of income not being declared, and the tax would be collected under PAYE as opposed to in arrears under self assessment.
There are obviously some people who are definitely employed, some who are definitely self employed, and some who fall into the grey area between.
In order to try and establish whether someone is employed or self employed, there are certain areas which need considering:
It is more normal for an employer to provide tools and equipment for an employee to do their job, whereas someone who is self employed would be expected to supply the equipment themselves.
Time and place
An employee may be expected to be in a particular location for a particular time dictated by the employer. Someone who is self employed may have the flexibility of doing the work as and when they prefer.
Generally, an employee is paid to do a job with little prospect of financial risk. However, someone who is self employed should have an element of financial risk. They may be paid a set amount to do some work, which may be the same regardless of how long the job takes.
Right of substitution
This is the undertaking to provide a service regardless of who may be doing the work – a situation which wouldn’t happen with an employee.
This is obviously a subjective area; generally speaking, the more boxes which can be ticked, the more likely it is that someone is self employed, although it usually depends upon the circumstances of the individual case. Additionally, the areas highlighted above should be genuine and documented. However, simply having a contract from the ’employer’ which says “Joe Bloggs is self employed and is responsible for his own taxes” is not sufficient.
If you need help establishing whether someone – a helper, or yourself – is employed or self employed, please contact us.