Employment Status: Employed, Self-Employed or Worker Status?

For many years tax regulation and case law only recognised two categories of employment status, namely: self-employment or employment.

In recent years employment law has muddied the waters by recognising a third employment status, that of being a worker. The 'worker' status was introduced to address the widespread abuse of claiming self-employment in the UK gig-economy. It is half-way house solution that allows a business to legitimately engage a worker for a mutually agreed short-term engagement, where the remuneration is paid under PAYE, with a reduced set of employee rights. The worker will accrue holiday rights, which can be paid as part of the remuneration package. In contrast, full-time employees can only be paid holiday-in-lieu at the end of their employment contract.

From a construction firm's operational perspective, it is understandable why they would wish to engage the same reliable and trusted individual contractors on a regular basis. The tax compliance conflict arises when the frequency of the engagements, or the nature of the working relationship, compromises the contractor's self-employed status. Treating the contractor as a 'worker' legitimises the arrangement.

Adopting a 'worker' status arrangement rarely proves popular in practice for either party. The engager has to process the contractor's remuneration through their PAYE scheme and suffer additional tax, and paid holiday costs. The contractor will find their right to offset self-employed expenses will be eroded when they come to prepare their self-employed annual accounts and tax return. They also often find the switch from receiving the majority of their income on a weekly to a monthly basis hard to manage.

Expediency and wishful thinking are rarely aligned with tax compliance. So, for the moment, using the 'worker' status working arrangement is the only tax-compliant option for engagers that wish to continue to use the same individual contractor on a regular basis and avoid the huge tax bill that will arise if the HMRC disagree with your tax treatment in a subsequent tax-investigation.

The current government has stated it plans to reform and clarify employment status as part of sweeping changes to employment law during their term in office. We shall see if the promised changes makes a very confused situation any better.

Further reading:

• HMRC guidance on the casual worker.
• ACAS guidance on the casual worker.
• HMRC employment Status checker
• Practical advice on how to avoid making mistakes over deciding employment status with contractors.
• Can a CIS-paid contractor for tax purposes also be a labour-only contractor for insurance purposes? We suggest they are mutually exclusive. Read why.