Employed versus Self-Employed Status Ian M Harris Leicester City Council

1. Employed versus Self-Employed Status Ian M Harris Leicester City Council VAT & Taxation Advice Office

2. VAT & Taxation Advice Office • Who are we? • Ian Harris: Taxation Officer • Part of Resources Department • Financial Services Division • Where are we? • Room B2.09(B), New Walk Centre • Extension: (29)7470 (0116-252-7470) • Fax: 0116-255-2443 • Mobile/Text: 07980-339581 • E-mail: vattax@leicester.gov.uk

3. Employed or Self-Employed? • All payments to individuals for work done (labour or ‘personal services’) by that individual need to be examined • is the recipient genuinely self-employed • or • is the recipient really an employee of the Council • Where the payee is a limited company the rules do not normally apply

4. Why Is It Important? • If an individual treated as self-employed was actually an employee: • LCC will be responsible for paying Income Tax and employees’ NIC’s with no right to recover these from the employee • LCC will have to pay employers’ NIC’s • the employee will lose social security benefits entitlement and employment protection rights and will not be protected by the National Minimum Wage rules

5. Employed or Self-Employed? • All payments for labour or personal services are covered • This includes professionals, eg consultants, not just manual workers • Each engagement must be examined independently • Previous employment or self-employment is no guide for the current engagement

6. Employed or Self-Employed? • The key determining factor - is the engagement: • a contract of service • or • a contract for services • The former is employment • The latter is self-employment

7. Revenue & Customs Guidelines • Revenue and Customs say the following indicate employed status: • the worker has to do the work themselves (ie they cannot hire someone else to do the work) • the worker is directed when and how to do the job • payment is by the hour, week or month • the worker gets paid overtime • the worker is entitled to paid leave • the worker works a set number of hours each week or month • the worker works on the Council’s premises

8. Revenue & Customs Guidelines • Revenue and Customs say the following indicate self-employed status: • the worker is free to hire someone else to do the work • the worker has the final say on when and how the work is done • the worker risks their own money in their own business, having the final say in how that business is run • the worker meets the losses as well as takes the profits • the worker provides the tools and equipment necessary to carry out the work • the worker has to correct unsatisfactory work in his/her own time and at their own expense

9. ‘Control and Supervision’ • ‘The worker is directed when and how to do the job’ - ‘control and supervision’ • the Council has the right to exercise control • actual control is not necessary as long as there is a right of control • but where specialist expertise is required such control may be minimal • the Council has the right to determine what work is done • for example the worker works as part of a co-ordinated team

10. ‘Substitution’ • ‘The worker has to do the work themselves (ie they cannot hire someone else to do the work)’ - ‘substitution’ • the services delivered are those of the worker him/herself • the worker cannot choose whether to do the work or get someone else to do it for them

11. ‘Provision of Equipment’ • ‘The worker provides the tools and equipment to carry out the work’ • the provision of significant items of equipment to do the job is fundamental • contrast this with a worker provided with office space and all the equipment to do the job • but remember some trades routinely provide their own small tools • and remember many employees sometimes work from home using their own equipment

12. ‘Financial Risk’ • ‘The worker risks their own money in their own business, having the final say in how that business is run’ • the worker buys and maintains equipment and stockpiles materials • the worker quotes a fixed price for the job so risking additional costs if the job overruns • the worker incurs significant skills training costs • but remember many employees incur costs to keep their skills up to date • the worker can profit from his/her sound management of the business • but do not confuse this with an employee’s ability to earn promotion by demonstrating sound management

13. ‘Basis of Payment’ • ‘Payment is by the hour, week or month’ • ‘The worker gets paid overtime’ • employees are normally paid by the hour, week or month • and are generally entitled to overtime, long service bonuses, etc • self-employed workers are normally paid for the job • but piece-work and work on commission can occur with either

14. ‘Employee Benefits’ • ‘The worker is entitled to paid leave’, etc • employees are generally entitled to sick pay, holiday pay, pensions, reimbursement of expenses • self-employed workers are not • but remember temporary or casual employees may not be either • employees are protected from unfair dismissal • but employment can be terminated by giving appropriate notice • self-employed engagements end with completion of the job • but fixed term contracts could be either employed or self-employed

15. ‘Personal Factors’ • A worker working for a number of clients, either simultaneously or in succession, is probably self-employed • A worker who adopts a business-like approach to obtaining engagements is probably self-employed • But such personal factors are more relevant for ‘professional’ engagements • For unskilled workers the factors of the engagement are more determinative

16. ‘Intention of the Parties’ • The reality of the engagement determines status not what the parties intend it to be • calling a worker self-employed does not make him/her self-employed if the factors suggest otherwise • Only if other factors are inconclusive or evenly balanced does the intention of the parties indicate status

17. ‘Length of Engagement’ • Long periods of working for the Council may indicate employed status • especially if this is to the exclusion of others • But repeated re-engagement on short-term, contracts might also indicate employed status • Though the length of engagement is not decisive, if the worker is part and parcel of the Council’s organisation he/she is probably an employee

18. Other Factors • Other factors that might indicate self-employed status are: • the individual does the work he or she wants to do • there is no ‘mutuality of obligations’

19. ‘Mutuality of Obligations’ • ‘Mutuality of obligations’ is one of the key issues in determining self-employed status • If there is a ‘mutuality of obligations’: • the ‘client’ can expect the individual to be available for work whenever required to work • and • the individual can expect to be given work on a regular basis by the client • If there is no ‘mutuality of obligations’ the individual is probably self-employed

20. Other Factors • Other factors that might indicate self-employed status are: • the individual does the work he or she wants to do • there is no mutuality of obligations • the individual is required to provide a substitute if he or she is unable to do the work • the individual works for a number of clients not just the Council • the individual is an employer with his or her own employees • the Council exercises minimal control over the individual

21. The Guidelines and Other Factors • Revenue and Customs guidelines and the other factors quoted are only that though • None of the factors on their own are decisive • You must look at the terms of the engagement and weigh these against the guidelines to determine whether employed or self-employed status is more likely • Remember this determination applies independently to each engagement

22. Revenue & Customs Rulings • Revenue and Customs will give a ruling if requested • Such requests must be made through the VAT and Taxation Advice Office • You will have to provide: • as much detail as possible about the terms of the engagement • as much detail as possible about the individual • full name • home address • NI Number

23. Terms and Conditions of Engagement • Workers engaged by the Council must be on written terms and conditions • Based on these the engaging officer must decide whether the worker is employed or self-employed • To assist where self-employment is suspected, the VAT and Taxation Office has drawn up a checklist and draft ‘Agreement for the Supply of Services’ • Providing the actual terms and conditions of the engagement mirror those in the Agreement the worker may be considered self-employed • It is not obligatory to use this but any alternative should be agreed with the VAT and Taxation Advice Office

24. Some Case Law Examples • There are no statutory definitions of employed or self-employed status • We have to rely on case law precedent • Some of the more relevant cases are: • Specialeyes (Optical Services) Ltd • Narich Pty Ltd • O’Kelly v Trust House Forte • Hall (HMIT) v Lorrimer • Leslie • McMenamin (HMIT) v Diggles • Castle Construction (Chesterfield) Ltd and Wright

25. Special Cases - CIS • Payments to self-employed individuals in the construction industry are covered by the Construction Industry Scheme (CIS) • A deduction of 20% (or sometimes 30%) must be made from the labour element of all such payments unless the individual is eligible to receive payment gross • Eligibility must be verified with Revenue and Customs before payment can be made • Separate training covers the CIS

26. Special Cases - Entertainers • Payments to self-employed entertainers can always be made gross • Where such payments exceed £1,000 details must be sent to Revenue and Customs using Form 46R • All payments in respect of entertainers are covered, including to an agent, promoter or manager • The definition of ‘entertainer’ is very wide • If you make payments to ‘entertainers’ contact the VAT and Taxation Advice Office

27. Special Cases - Personal Service Companies • Payments to a limited company can always be made gross • But such companies providing ‘personal services’ must account for Income Tax/NIC’s on income from ‘relevant engagements’ • A ‘relevant engagement’ is one where the individual would have been an employee but for the interposition of the personal service company as an intermediary • The personal service company effectively has to act as the individual’s employer

28. Special Cases - Managed Service Companies • Workers engaged through a managed service company are not our employees • But such workers are employees of the managed service company which must account for Income Tax/NIC’s on income from their engagements

29. Special Cases - Deemed Employees for NIC’s • Certain workers regarded as self-employed for Income Tax purposes are still deemed employees for NIC’s • office cleaners and similar workers • telephone kiosk cleaners • workers working for their spouse • lecturers, teachers, instructors or similar working at an educational establishment run by an organisation providing education • ministers of religion • agency workers

30. Special Cases - Officeholders • Officeholders are treated as employees • elected members, coroners and deputy coroners, SIP’s, etc • But unpaid officeholders are volunteers • school governors, neighbourhood forum members, panel members, etc

31. Special Cases - Staff on Election Duties • Staff on election duties are employed by the Returning Officer • even if Council employees

32. Special Cases - Carers • Foster carers are self-employed • Adult placement carers are self-employed

33. Special Cases - Volunteers • Though work done by volunteers may be on employed type terms no employment where no remuneration • If not employed entitled to reimbursement of expenses tax-free (taxable for employees unless tax deductible) • eg home-to-duty travel, lunch, etc • Providing volunteers - • reimbursed actual expenses incurred • or • paid reasonable flat-rate allowance towards expenses • No Income Tax/NIC’s

34. Special Cases - Trainees • Trainees engaged by Council usually employees • Theoretically possible to be engaged on contract for training • But can then be doing no useful work

35. Special Cases - Non-UK Nationals • Employed versus self-employed no different just because worker non-UK national • But other issues eg is individual entitled to work in UK

36. Special Cases - Young Workers and Minors • Employed versus self-employed no different just because worker young person or minor • But other issues eg maximum hours can work

37. Casual and Temporary Employees • Many individuals currently treated as self-employed should probably be employees • Such individuals MUST be set up on and paid through Central Payroll

38. Penalties and PAYE Audits • Where Income Tax/NIC’s are not accounted for LCC well have to pay these with no right of recovery from the individual • We will also have to pay interest and possibly penalties • Revenue and Customs carry out regular PAYE Audits to ensure Income Tax/NIC's are being properly accounted for • These Audits concentrate on payments to casual and temporary staff

39. Your Responsibilities • It is essential that you identify all payments to individuals for labour or personal services • Apply Revenue and Customs guidelines to see if the worker should be treated as an employee • If so set the individual up on Central Payroll and account for Income Tax/NIC's as necessary

40. The VAT & Taxation Advice Office • If in doubt contact: • THE VAT & TAXATION ADVICE OFFICE • Room B2.09(B), New Walk Centre • Extension: (29)7470 • Direct dialling: 0116-252-7470 • Fax: 0116-255-2443 • Mobile/Text: 07980-339581 • E-Mail: vattax@leicester.gov.uk