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Traditional employment status or false self-employment is a key consideration for businesses hiring independent workers. But what is employment status and who does it apply to?

EMPLOYMENT STATUS

Employment status, or false self-employment, has always been an issue but due to its vague nature, it is rarely mentioned until there is a major employment rights case such as the well-publicised ruling involving Uber drivers.

It’s likely that you have heard the phrase before in differing contexts but, when it comes down to it, what does employment status mean?

WHAT IS EMPLOYMENT STATUS?

Employment status is the categorisation of workers. This categorisation helps to indicate the worker’s rights, the responsibilities of their employer, and the tax deductions that are applicable.

According to the government website, the five main types of employment status are:

Worker

e.g. a person working on a zero-hours contract

Self-employed and contractor

Employee

Director

e.g. a board member that oversees business affairs

Office holder

e.g. fulfilling an appointed position within an end client’s company

Who does employment status apply to?

If you are a UK business engaging sole traders to perform services for your organisation, you will need to consider the employment status of these workers. Separate legislation (IR35) applies for engaging personal service companies. See below for more information about how these differ.

Traditional employment status for tax is specifically based upon the relationship between the client and the worker and is not relevant in engagements involving recruitment agencies (where the Onshore Intermediaries rules need to be considered instead).

The tax liability for employment status sits with the engagers of sole traders who will be liable for Employer’s National Insurance and other employment tax should the sole traders they engage be deemed employed for tax purposes.

Businesses such as IFA’s (financial advisory firms), construction companies, and increasingly the oil and gas industry are most at risk and will continue to feel the strain of HMRC’s investigation of employment status.

At Qdos we expect to see HMRC turning their sights to employment status now that the off-payroll rules (IR35 reform) have been implemented in the private sector, and so it is important to ensure your business has processes in place to determine the employment status of any sole traders you engage.

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EMPLOYMENT STATUS COMPARISONS

What is the difference between employment status for tax and for rights?

Put simply, employment status for rights is the use of a worker’s employment status categorisation as a pointer towards the rights that are appliable to them in their work. For example, a worker classified as an employee would have more rights afforded to them, such as holiday and sick pay, than a worker who is fully self-employed.

On the other hand, employment status for tax is where the employment status categorisation of a worker serves as an indicator to HMRC for how much tax and National Insurance contributions should be deducted from the worker.

Because of the way the system works, employment status for employment rights and employment status for tax purposes are not aligned. This was referenced in The Taylor Review of Modern Working Practices from 2017, wherein Matthew Taylor proposed the alignment of these frameworks. As yet we have seen no evidence of this alignment coming to pass. As such, employment status for tax tends to fly under the radar leaving the hidden risks it poses unchecked.

What is the difference between IR35 and employment status?

IR35 is a piece of legislation introduced in 2000 aimed at targeting perceived tax avoidance by disguised employees through the use of an intermediary such as a PSC. When you determine IR35 status, you are determining the employment status of the worker for tax purposes. However, IR35 is specific to personal service companies (PSCs) i.e. directors of limited companies providing their own services, usually without any other employees or fee-earners, also known as limited company contractors.

IR35 was introduced to close a loophole in the tax system which enabled PSCs to avoid the issues of employment status for tax, and because of its easy to remember moniker and more specific legislation, has become more well-known than general employment status or false self-employment.

Wider employment status covers all workers, including sole traders and gig economy workers. With employment status, the engager of the worker is responsible for making sure that the sole traders they engage are genuinely self-employed rather than working as an employee would.

Employment status for tax in essence functions similarly to IR35, however throws a much wider net. As such, this constitutes a larger threat to the industry as it stands, as it appears to be so often overlooked.

CONSTRUCTION INDUSTRY SCHEME VS EMPLOYMENT STATUS

WHAT IS CIS?

The Construction Industry Scheme (CIS) is a scheme created by HMRC that sole traders can register for if they are providing services to a contractor in the construction industry. This scheme means that any payments made by the contractor to their subcontractor (sole trader) must take into account the subcontractors’ CIS status and make deductions where necessary.

How does the Construction Industry Scheme work?

On the .gov website it states that ‘for a contract to be within the scheme, it must not be a ‘contract of employment’. This means that the scheme applies to workers who are self-employed under the terms of the contract and who are not employees subject to Pay As You Earn (PAYE)’.

Where the scheme begins to get convoluted is this same section goes on to state that it is the contractor’s responsibility to decide their subcontractor’s employment status when they first engage them.

At Qdos we are seeing a hidden risk emerge, especially for employers of self-employed construction workers. CIS, as referenced above, is a scheme that regulates tax receipts by forcing deductions at source.

CIS registration is not an indicator of employment status

The root cause of confusion when it comes to employment status for tax and CIS is that many of those working in construction are led to believe that the construction industry scheme is connected to employment status or indicative of it. It is a popular belief that those engagers that fulfil their CIS obligations have therefore fulfilled their responsibilities when it comes to employment status.

Having a CIS registration does not mean that a worker is self-employed. Due to the fact that no real investigation is taken into employment status as part of the CIS registration process shows that the registration itself is no definitive indicator of a worker’s employment status.

In fact, engagers of construction subcontractors will retain a significant potential liability. In addition to the fact that construction makes up the largest single population of self-employed workers, it’s likely that the construction industry may well become one of HMRC’s biggest targets.

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WHAT ARE THE RISKS OF EMPLOYMENT STATUS?

How do HMRC enforce employment status?

HMRC routinely carry out checks into companies who engage self-employed 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 will be tasked with policing the engagers of all flexible workers, covering sole traders, IR35, and Onshore Intermediaries.

Once HMRC determine that there is 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, it is highly advisable for engagers to seek specialist representation in the event of any compliance activity from HMRC.

What do you need to do about it?

Engagers should be checking whether their workers are genuinely self-employed or whether they are actually functioning as employees.

Whilst there is no requirement for engagers to provide a Status Determination Statement like there is concerning IR35 status, that does not mean that the risk of employment status is any lesser.

Engagers of sole traders should go through the same risk assessment as is required of IR35. This means undertaking working practice assessments as regularly as possible, at least at the start of the engagement and once annually for longer engagements, and keeping a clear record of any evidence of a worker’s employment status.

When HMRC investigate employment status they use the same kind of employment status tests as are used for determining IR35 status.

As such, this leads to the query of ‘how can I check my employment status?’. It is vital that organisations maintain robust contracts, processes and policies around status. Actual working practices are also pivotal, so routine and regular checks into how things work in practice are also required.

At Qdos we understand the risk that employment status brings engagers, as such, we encourage all engagers to undertake audits of employment status where possible.

Qdos can also provide insurance policies to cover not only the costs of defending a employment status investigation, but also the potential tax liabilities.

For more information on what you should do to tackle your employment status risk and how we can help, get in contact with a member of our team.

THE SUPPORT YOU NEVER KNEW YOU NEEDED

Here at Qdos, we have been supporting 90,000+ contractors for well over two decades. When it comes to IR35, you can trust us and our process. We have, after all, spent over two decades fine-tuning our skills.

The most important thing we can provide to you is our expert team. Through them, we can ensure that you are not alone during any part of the process of implementing your new policies. We also offer a range of bespoke training packages to suit the requirements of your business. Ensuring confidence in the knowledge of your employees.

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