There is little doubt that employment practices in the UK are changing. You may have heard of, or work in, the ‘Gig Economy’. This is where temporary positions are common and businesses contract with independent workers for short-term engagements.
At one end of the market there are legitimate contractors working, often through their own personal service company, for a daily rate on a fixed term project. At the lower end of the market, businesses are forcing lower paid employees down the self-employed route.
Why do we care about employment status?
Classifying workers as self-employed rather than as employees has many benefits to businesses. For example, no National Insurance is paid by the business or deducted from the worker’s pay.
Employees receive the National Minimum Wage, holiday pay, statutory rest breaks, 48-hour maximum working week, plus Statutory Sick, Maternity and Redundancy Pay. They also have rights regarding unfairly dismissal, time off work and flexible working.
The self-employed worker has limited sickness, disability and maternity rights and receives few benefits. In addition, the Minimum Wage rules do not apply. If workers are not employees, it is much easier to dismiss them and offer no or reduced work.
This article is written by an accountant assisting clients with tax issues. The same rules that determine if a worker is an employee under employment law also apply to the tax status of workers for employment and self-employed tax law.
When an employee receives their pay, this is their net pay. If it is determined that a worker is not working under a self-employment relationship, then the business will have to gross-up their net pay and workout and pay any tax due based on an inflated gross pay.
An example may help to illustrate the issue
If Bob receives £68, for doing some building work and it is determined that he is an employee, then The Building Co which paid him would have to work out his gross pay. Following the tax and National Insurance (NI) rules, this may work out at a gross pay of £100 and tax and employee’s National Insurance Contribution (NIC) of £32. In addition, The Building Co would have employer’s NIC to pay of £14.
As can be seen, it may actually cost The Building Co £114 to pay Bob £68. If the employer gets things wrong, it will be The Building Co that HMRC will go to for the extra £46. That’s an extra 68% over what Bob was actually paid. You can see why HMRC are keen to challenge businesses that misclassify their workers, either intentionally or through ignorance of the law.
Employee or self-employed?
It is the nature of the work and the relationship between the business and the worker that is important and not the length of the service. It is therefore quite possible to have an employee working on a short-term contract for a few days and to have a long term self-employed relationship with another worker.
Written contracts may help to set out the position for workers where there is a fine line between whether a worker is employed or self-employed. However, the reality of the position must be reviewed. A Judge once said in a tax case that you can call a cow a horse, but the cow is not a horse. Similarly, you can say by signing a contract that a worker of your business is self-employed, but if the facts of the case are that the worker is an employee, then the law will set aside the written documentation and look to the actual facts of the relationship.
The rules for determining employment or self-employment
There is no list of fixed rules set out in law. There are a number of tests that the courts have decided upon over the years. These form the rules that should be followed. Many cases continue to go through the courts as the rules on status can be complex to apply in practice.
Case law has established that deciding the employment status of an individual is not a mechanical exercise of running through items on a checklist but requires a qualitative judgment of the overall position. In other words, all the facts of the situation must be considered in their entirety, though generally some elements of the relationship would carry more importance.
The main facts to consider are as follows:
Mutuality of obligation
Does the employer have to offer work to the workers and does the worker have to accept it? Can the worker decide the hours of work?
Level of supervision, direction or control
Can the person decide what work to do, how and when to do their work and where to provide their services? The “what, when and where” factors are not as important as the “how”. An employer traditionally has the power to determine what they do, when they do it and where an employee works but also how they do a job. It is not so much the where, what and why that is important but the ultimate power to control and determine how the job is done, even if this is not actually applied on a day-to-day basis. If you cannot tell someone how to do the work, it is a good indicator of self-employment.
An expert or senior person in a particular field, e.g. brain surgeon, IT specialist or company accountant, would probably have more responsibility and limited control and supervision placed on them. However, a more junior person would have a greater element of supervision, direction and control on their day-to-day work. Just because a person is an expert, or a senior person, does not necessarily change their employment status. A tightly controlled expert could be an employee but are loosely controlled lower skilled person may be self-employed.
Ability to send a substitute
The right to provide a substitute is one of the main indicators of self-employed status. An employee cannot send a substitute to do their work, but a self-employed worker can. An employee must provide their personal service, but a self-employed person could send a substitute Can they hire someone to do the work, or engage helpers at their own expense? If they can then the worker is probably self-employed. If a substitute is ever used then it is important that the worker pays the substitute, not the engaging organisation, otherwise it is not substitution. If the engaging company can reject the substitute or if the contract specifies that the worker must perform the work themselves then this is indicative of an employment relationship.
Level of integration
Is the worker part and parcel of the business e.g. a key manager? Do they attend office parties, training courses and have appraisals? Do they have company business cards? Do they wear the firm’s uniform? How does the worker identify themselves to their client's staff and own customers?
Holiday and sick pay
Employees get holiday and sick pay when they are off work. They may also receive other employment entitlements e.g. paid for training courses. The self-employed do not. Are they a member of the work-place pension scheme?
In business or not
Self-employed workers are often ‘in business’ on their own account. They have the ability to make more money by following good business practices. Employees receive the same salary or hourly rate regardless of the amount of work they do. Conversely, the self-employed must take the risks of their own actions, with their own money and can therefore make a loss as well as a profit. An employee normally still gets paid if they do a job wrong. The self-employed have to remedy any defective work. The self-employed take out business insurance and also bear the risks and rewards of being in business.
Payment terms
Employees are normally paid based on the number of hours they work and at a fixed rate of pay. The employer normally calculates the amount payable and the employee does not have to request the payment, as it is normally automatically paid to them each weekly or month.
The self-employed normally agree a fixed price to do a job regardless of how long the job actually takes. They have to send an invoice to their customer and chase payment as required.
Nature of the work
The nature of the work and an exclusivity agreement is important. If the worker can work for other organisations doing similar work then this indicates self-employment. A restraint of trade clause which restricts the worker’s ability to work for others suggests that the worker is not engaged as an independent business and is an employee. Does unsatisfactory work need to be corrected in your own time and at your own expense? If so, this may indicate that you are self-employed.
Length of contract
Employees tend to have longer and on-going contracts. The self-employed tend to have shorter contracts and often to do a particular piece of work.
Number of other contracts / employers
An employee would normally work for one employer and sometimes several at the most. The self-employed usually have lots of short-term contracts.
Who supplies the main items equipment to do the job?
An employee may provide their own calculator or bricklaying trowel, but they probably would not be expected to supply their own computer or JCB digger.
Ability to work for others
Employees are often restricted from working for other employers or competing with who pays their wages. The self-employed can work for whoever they wish.
It may be difficult to describe what a cow looks like to a person playing a game of charades. You go through lots of descriptions. However, when they actually see the cow it is quite clear what they are actually describing. It is a bit like that when determining if somebody is an employee or a self-employed worker; it is much clearer when you look at the whole thing.
What is HMRC doing? - The CEST online tool
HMRC is directing a lot of activity to dealing with businesses which misclassify individuals as self-employed and is taking steps to pursue such businesses for tax, interest and penalties in cases where they incorrectly treat employees as self-employed.
HMRC is transforming its compliance approach with the creation of a new employment status and intermediaries team.
HMRC have created an online tool to help determine employment status. See the HMRC ‘Check Employment Status for Tax’ (CEST) tool.
Traditionally, most HMRC offices had a status officer whose role it was to review the facts of a particular engagement and consider if a person was employed or self-employed. Such enquiries were time consuming and laborious and, despite the potentially rich pickings, the fact that such cases were based on the interpretation of case law rather than detailed legislative definitions meant that cases tended to get mired in the interpretation of detailed clauses.
Due to the substantial reduction in HMRC offices and personnel coupled with the significant success that they have enjoyed when they have pooled their expertise through dedicated units and standardised their approach to different perceived abuses of the tax code, HMRC have now decided to turn their attention to this potentially lucrative source of income for the treasury.
The Check Employment Status for Tax (CEST) tool gives HMRC’s opinion of a worker’s employment status. The outcome is based on the answers to questions that you enter into the online tool. It is biased to HMRC’s thinking. Essentially, the tool replaces the Tax Inspector ‘s view.
The CEST tool can be used by the customer or supplier of services e.g. the worker or the paying organisation / agency. Of course, the CEST tool can be used by the worker to check their own status determination reached by the hiring organisation and challenge it if need be.
HMRC say that it will stand by a determination. The CEST test is anonymous, but HMRC recommends that you retain a copy of the results.
The CEST tool is not compulsory for determining employment status for tax purposes though using it will constitute ‘reasonable care’ if later challenged by HMRC.
The CEST tool is widely criticised as being difficult to use and resulting in too many “unable to determine” results.
The Uber case (Aslam and others v Uber BV and others)
In applying long-standing employment law rules to new systems of working, an employment tribunal recently decided that drivers at the Uber taxi business were not self-employed. In reality, these workers were employees. This ruling has now granted an estimated 40,000 UK Uber drivers basic employment rights such as the minimum wage, working time rights and paid holidays.
The Atholl House Productions and Kaye Adams case
In February 2021, HMRC lost another high profile IR35 case
The First-tier Tribunal (FTT) found that TV presenter Kaye Adams was a self-employed freelance presenter through her personal service company, Atholl House Productions. The initial ruling by the FTT considered the company’s contracts with the BBC over a number of years.
The Upper Tribunal (UT) decided that the IR35 rules did not apply to Atholl House Productions despite that there was mutuality of obligation (i.e. ‘employer’ must give work and ‘employee’ must accept given work) between Atholl House Productions and the BBC. Key pointers of an employment relationship, as set out through past court cases, normally requires personal service and a degree of control over the person’s work. These were all present in this particular case.
Perhaps, HMRC expected to win the appeal case at the UT as the three key status indicators, when present, would normally be critical in determining an employment status ruling.
However, the extent to which Kaye Adams was in business on her own account proved to be the deciding factor in the tribunal’s ruling. It was noted that the uncertainty of the industry she worked in meant that her roles could come to an end without notice was entirely consistent with Kaye Adams being an independent contractor. This was even though she had, through her personal service company, spent a considerable proportion of her working time at the BBC, undertaken work for many other clients.
The final decision helps to illustrate, once again, that when reviewing IR35 status cases that it is not appropriate to solely run through a checklist and tick some of the keys boxes. It is important to closely review the specific circumstances of each case.
Gary Lineker
We can’t remember the last time that an employment status case made the headlines across all sections of the media.
Gary Lineker, the former England footballer, who never received a yellow or red card in his career, is now being pursued by HMRC for almost £5 million in tax because he provided his services through a personal service company with his ex-wife Danielle. This tax amount appears very high, but the amount actually at stake appears to be in the region of around £0.5m to £1m because a large proportion of the tax liability has already been paid through other tax payments e.g. Corporation Tax rather than National Insurance and Income Tax.
Once again, HMRC is saying that Gary Lineker was engaged on terms that meant he was employed, in all but name, with the BBC and BT Sports.
One of Gary’s arguments in the case is how much leeway he has in terms of political commentary on social media. As you may be aware, employees at the BBC are required to be impartial. Whether this carries any weight at tribunal will be interesting to see.
The ability of a business to substitute one worker for another would normally be one of the strongest indicators that you, as the main worker of the company, are genuinely self employed and therefore win in court hands down in these types of employment status cases with HMRC.
When do you remember Danielle Lineker presenting a TV program because Gary didn’t feel like it or was sick. Probably, more pertinently would be if Gary recruited the services of another famous footballer to act as a replacement on the show now and again.
However, would the BBC or BT Sport be happy with that. If it was a genuine self-employment, and a suitable substitute was provided by Gary, at his own cost, then the broadcaster could not prevent the substitute. If Gary could demonstrate that he, rather than the broadcaster, could control his own destiny then that would certainly help his case.
Gary Lineker will hope that his case follows those of Lorraine Kelly and Kaye Adams, where they both won against HMRC and were found to be self-employed.
However, Eammon Holmes, Tim Willcox, Joanna Gosling and David Eades were all less fortunate and lost their cases.
The Adrian Chiles case
Adrian Chiles is a sports broadcaster with ITV and the BBC and former BBC One Show presenter.
In 1996, the BBC told him to end his employment with them. Instead, he was instructed to continue to provide his personal services through as a personal service company, Basic Broadcasting Ltd (BBL), which he had to set up for that purpose.
He provided his services under three BBC contracts and two ITV contracts. He also worked for other businesses.
H M Revenue & Customs issued income tax and National Insurance determinations for over £1.7m in back taxes.
In order to resolve the IR35 case with HMRC, the tribunal was required to consider the hypothetical contracts between Adrian and the BBC and ITV, i.e. ignoring the actual contracts between BBL and the BBC and ITV. This was to determine if Adrian would have provided his personal services under contracts of service directly between ITV/BBC as a sports broadcaster and an employee of the BBC and ITV. If this was found to be the case then BBL should have treated the profits generated as employment income of Adrian. Accordingly, income tax, employee’s and employer’s National Insurance would have been paid instead of lower combined Corporation Tax and tax on dividends drawn from BBL.
Substitution clause
Both ITV and BBC contracts specifically prevented Adrian from providing a substitute. On its own this would indicate that Adrian was an employee. HMRC placed reliance on the absence of substitution. However, the tribunal considered that inability to provide a substitute did not indicate that these contracts were outside of Adrian’s normal established business activities.
In business on your own account
The tribunal considered the most significant factor in this case was whether Adrian was ‘in business on his own account’. This is the same considered approach used in the Upper Tribunal in the Atholl House and other significant cases. It carried more weight in determining his employment status in the overall picture.
It was accepted, overall, that Adrian was in business on his own account ignoring BBL. The deciding factors included the number of clients Adrian worked for and the projects he worked on. He undertook considerable research. Some of his projects generated no income and where exploratory. Adrian also paid around 15% of his income to a management company to help advance his reputation and earnings i.e. a quasi-advertising cost.
Mutuality of obligation
The tribunal considered the level of mutuality of obligations in the hypothetical contracts and whether Adrian would be performing his services as an employee. The tribunal thought that Adrian did not have sufficient control over his work to determine that there was a contract of employment. However, in isolation, the tribunal did not consider the BBC’s and ITV’s control of Adrian to be a compelling factor.
Integral part of the business
Adrian provided some equipment for his work. HMRC argued that he was an integral part of the business of ITV and BBC. However, the tribunal judges decided that he may have been an integral part of the programmes, but not an integral part of the businesses of the BBC and ITV. You would expect an employee to be an integral part of a business, where as a self-employed person would not.
Conclusion
As is important in these circumstances, the judges had to standing back and look at the whole picture of the hypothetical contracts. In conclusion, they thought that Adrian was in business on his own account and that the IR35 legislation did not apply in this case.
Other TV presenters
Tim Willcox, Joanna Gosling and David Eades were targeted by H M Revenue & Customs, saying that they were not freelancers (self employed) even though they worked through their own personal services companies to reduce their tax liabilities. HMRC chased them collectively for £920,000 and won their cases.
It can be extremely difficult to determine employment status and it often takes experts to argue the case through the courts. The cases were decided on two key employment status tests relating to mutuality of obligation (between broadcaster and presenter), and the level of control between the BBC and the presenters. Three judges could not always decide the case and it came down to a third judge with a casting vote to settle the case.
The courts even said that ‘the BBC were in a unique position and used it to force the presenters into contracting through personal service companies and to accept reductions in pay’ rather than putting them ‘on the books’ and deducting PAYE from their gross earnings.
We have a great deal of sympathy for these presenters. The BBC and other broadcasters have dictated that hundreds of well-known presenters had to form limited companies, and work through them. It gives the BBC and other big broadcasters the flexibility to use the services of the presenters and pushes any future tax risk, of presenters being miscategorised, from the broadcast on to the presenters, and with large tax bills years later!
The CitySprint case (Dewhurst v CitySprint UK Ltd)
As reported by Croner Taxwise, the external tax advisors and HMRC Fee Protection Insurance providers for All Paul Limited, the first in a long line of 2017 ‘status’ decisions has been released.
The London Employment Tribunal found that a medical cycle courier working for CitySprint was actually a worker and not a self-employed ‘contractor’ in Dewhurst v CitySprint UK Ltd.
In similar fashion to Uber, CitySprint operate on a pay per job model for around 3,200 bicycle and van couriers. Their documentation ensured couriers were defined as ‘self-employed contractors’ and contained common self-employed clauses, including that there was no mutuality of obligation and that the couriers had the right to find a substitute.
The turning point of the decision was where the judge looked at the reality of the courier being in ‘business on their own account’. They found that the courier was dependent on CitySprint economically and organisationally whereas a person operating a business would never be in this position. The tribunal also found that there were a number of other indicators of ‘worker’ status including:
the control CitySprint exercised over the couriers such as directing them whilst on jobs, instructing them to smile at customers, paying them using the company’s pay formula and issuing uniforms to wear;
cycle couriers couldn’t substitute another courier in reality and, even if they could, the ability to do so was so small because of the limitations outlined in the contractual documents; and
couriers couldn’t actually carry out work for other companies whilst carrying out jobs for CitySprint.
The documentation was described as ‘contorted’ due to the inequality of bargaining positions of the parties and Dewhurst was found to be working when she was ‘on circuit’; essentially, from when she turned on her tracking device to when she told the control room she had finished for the night.
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