Tackling false self-employment: which status rules apply?

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Which status rules apply to the workers you engage and how to steer clear of false self-employment

TACKLING FALSE SELF-EMPLOYMENT

There are a variety of different trading methods available that individuals can provide services through. There are also different status rules that apply to each of these trading methods and the manner in which you engage them.

With so many trading methods and differing rules for each, it’s no wonder that false self-employment has proven itself to be a complicated topic for businesses to master or even access suitable information.

What is false self-employment?

Put simply, false self-employment is where an individual is falsely labelled as working under self-employment when in reality, they are completing the work in a manner that is in line with employment.

False self-employment can apply to any individual fulfilling a role for your organisation without a contract of employment. However, there are different rules that apply depending on the trading method and manner in which they are engaged.

To keep things simple, we have put together a handy guide about which status rules apply to each scenario and what this means for your business.

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Employment Status

Traditional employment status is focused upon the relationship between a client and their directly engaged sole traders.

Client businesses will need to determine the employment status of any sole trader engagements. The three categories used are:

Employee
Worker
Self-employed and contractor

These categories indicate the employment rights of the individual, the responsibilities of their employer/the client organisation, and the tax that is applicable (take a look at our Employment Status Liabilities Calculator to find out how much you could be liable for).

Traditional employment status looks at the working practices of the individual and their relationship with the client organisation. The three key status tests that are used to determine self-employment are (but not limited to):

Substitution: The right to provide an alternative individual in order to fulfil the services
Control: The right to control how, when, and where the services are delivered
Mutuality of obligations: The mutual lack of obligation between the parties

To find out more about traditional employment status, take a look at our designated information centre.

Onshore Intermediaries Legislation

The Onshore Intermediaries Legislation ensured that as of 6^th April 2014, any sole traders engaged via an agency that are deemed to be employees will have national insurance and tax deducted by the agency.

Where employment status and IR35 focus on a wider range of status indicators, the Onshore Intermediaries Legislation focuses primarily upon whether an individual is subject to supervision, direction, or control (often referred to as SDC) whilst performing their services.

If it can be proven that a sole trader is not subject to supervision, direction, or control whilst carrying out their services it is a positive indicator towards that sole trader being genuinely self-employed.

To find out more take a look at our onshore intermediaries legislation webpage.

IR35 (Off-payroll working rules)

Introduced in April 2000, IR35 is a targeted legislation aimed at assessing the employment status of individuals using personal service companies (limited company contractors).

It uses the same employment status tests as traditional employment status above and operates in much the same way.

It was intended to close a loophole in the tax system whereby an individual or client business could get around the traditional employment status rules through the use of a personal service company (PSC).

Since 6^th April 2021, all client businesses in the public sector and all medium-large businesses in the private sector, are required by the legislation to determine the employment status of their limited company contractors, and the correct tax must be deducted at source before paying the PSC’s fee.

The working practices and contracts of an engaged PSC can be assessed in order to understand whether an engagement between a company and PSC falls inside or outside IR35.

To understand more about IR35 and what it means to be inside or outside, take a look at our IR35 webpage.

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HOW DOES FALSE SELF-EMPLOYMENT HAPPEN?

There are a number of reasons why an individual may be falsely assigned their employment status:

The individual or the engager seeks to benefit from the lower rates of tax and national insurance contributions that are paid by the self-employed, such as with the use of a limited company
Misunderstanding or lack of knowledge of the status rules that apply to certain trading methods. Whilst IR35 is now widely known, the issues surrounding traditional employment status for sole traders are much less so.
Through the often unclear and subjective nature of applying employment status. The vast majority of workers and businesses seek to pay the correct tax however despite due diligence, HMRC do not always agree with the decisions made, and simple errors can still be made.

It is important that the employment status of contingent workers is considered and correct from the outset and that they work in a manner that is consistent with this status. Any mismatch could cause problems down the line with HMRC and leave businesses open to enquiry.

WHAT ARE HMRC DOING TO COMBAT FALSE SELF-EMPLOYMENT?

HMRC carry out routine checks into engagers. Their dedicated Employment Status and Intermediaries Team are tasked with policing all engagers of flexible workers. This targets not only traditional employment status but the onshore intermediaries and IR35 legislation also.

Whether their initial enquiry comes from the result of a routine check or a more targeted approach, a tactic previously used by HMRC, they are known to mount extensive investigations into companies. Not only is the defence of these investigations time consuming and costly but there is also the possibility that the case may go to a tax tribunal, and ultimately result in the repayment of owed tax revenues.

HOW CAN YOU PREPARE?

All engagers of flexible workers should be consistently checking whether workers are genuinely self-employed or if they are instead fulfilling the role of an employee.

Not only does this impact the tax obligations of your business, but also the employment rights afforded to the individual.

Working practice assessments should be undertaken at least once at the beginning of the engagement and every 3-6 months thereafter for longer engagements. A clear record should be kept of any evidence pertaining to an individual’s employment status and actions taken to determine this status.

GET THE SUPPORT YOU NEED

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 an 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.

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