Are your workers an employee or a subcontractor? Contractors can face large tax bills if the employment status is incorrect.
In the current evolving gig economy the jobs completed by an employee and a subcontractor can be very similar. The tax however is very different, so the correct treatment is a must.
We will explain why all this matters and what the main differences are between an employee and a subcontractor. We also provide a link to an employment status test provided by HMRC.
HMRC receive more in taxes if the employment status is treated as an employee. Employers don’t pay national insurance on subcontractors but they do on their employees.
For this reason alone it is in HMRC’s interest to challenge the employment status of all subcontractors in the hope that they can prove that they are employees and should be taxed as such. HMRC will backdate the taxes owed if the employment status is incorrect.
To avoid this additional tax, contractors must therefore ensure that all of their subcontractors are indeed subcontractors for tax purposes and not potentially an employee.
Employees also have more rights such as minimum wage, pensions, holiday pay, sick pay. This can be a further burden on contractors should the employment status be challenged.
An individual who works for a business is an employee if the majority of the statements below are considered true:
– Have a set number of hours e.g 9am to 5pm, 5 days a week
– Must work the hours above unless on sick leave, holiday leave, etc
– Are paid hourly, weekly, monthly or an annual rate
– Can be paid overtime
– Are paid whether there is any work or not
– The work to be done is decided by the employer (how, when, what and where)
– Must do the work themselves
– Are provided with tools, equipment, computers, etc by the employer
– The contract is open ended (after any probation period)
– Have a company email address and business cards
– Have a uniform or use company vans, etc
An individual who works for a business is a subcontractor if the majority of the statements below are considered true:
– Can choose what hours they work
– They quote for contracts
– Are paid per contract, regardless of how long this takes to complete
– Work for numerous different businesses
– Can make a profit or a loss on a job by job basis
– They make the decisions on the work to be done (how, when, what and where)
– Can hire other people to do all of the work or assist them
– Provide their own tools and equipment or possibly hire them
– The contract is for a fixed period
– Have an email address and business card for their business only
– Any uniform has their name on and not the contractor
– They use their own van
HMRC will take a view on the employment status by looking at the overall picture after considering all of the factors.
As an example a more senior employee such as a manager, may have flexi-time, have some control regarding how the work is carried out and may even bring in their own personal equipment. This does not make them a subcontractor.
Most of the questions regarding employment status depend on the power dynamic.
With employer & employee relationship the power is with the employer. They decide the hours, the pay, work to be done, how and when it’s done.
With contractor & subcontractor relationship the power is considered equal. The contractor can impose certain requirements within the contract. This would include work to be done, time frame, price, etc but the subcontractor has to agree to this. They could refuse to take on this contract.
The changing economy is making the tax status regarding employment more and more blurred.
A recent case, which made the news involved a company called Pimlico Plumbers Limited. An individual successfully argued that he was an employee and not self-employed. The main reason the court agreed with the individual is that he did not have any substitution rights. The contract did not allow for anyone else to carry out the work other than the individual himself.
Another notable case of employment status included Uber the taxi providing service. They were successful in arguing that their drivers are self-employed. As a result, the drivers aren’t entitled to minimum wage, holiday pay and other employee benefits. Deliveroo the take away delivery service were also able to argue that they used self-employed drivers.
HMRC have a useful tool available which allows you to check the employment status of individuals.
The questions are completed anonymously. The result is not legally binding and HMRC don’t keep a record of the result. However it is useful to see what type of questions they ask and what you should look out for.
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