The three recognised types of employment status

Practical advice for engagers and contractors wishing to avoid an employment status conflict

Many firms within the construction sector prefer to engage individual contractors as self-employed workers who are paid under CIS. This avoids the significant extra costs of directly employing such workers and paying them under a PAYE scheme. If the same individual contractor is engaged on a regular basis, it can compromise their self-employed status. It is unwise to ignore the working arrangement that actually exists in reality for such workers, and pretend it is one of self-employment when it is closer to disguised employment. If the HMRC become involved, they will consider and make their decisions based on the substance of the actual working arrangements between the engager and contractor. The legal form arrangements (written contract of engagement and the intentions of the engager and contractor) that were used to justify the CIS tax treatment are important, but they play second fiddle to the substance of the working arrangement.

Before we consider the impact of worker status on deciding what tax regime should be applied to a person providing their labour to an engager, we should consider what steps the engager must take to protect their position.

Although often ignored and absent, we cannot understate the importance of always having a written, signed, and dated contract of engagement (contract) in place between the engager and the contractor that states the arrangement is one of self-employment, if that is the intent. It is also important to have a separate written contract for every job, which we can show you how to easily achieve in practice.

We often find engagers effectively shoot themselves in the foot by failing to have a relevant and robust contract in place. It is not only severely compromises their ability to defend against a later HMRC challenge on employment status, it can also lead to their insurers refusing to meet an insurance claim caused by such workers.

If there is one thing you take away from reading this guide, is it is never too late to ensure a contract is in place for every individual worker you engage and pay under CIS. It is worth remembering taht you actually tick a box every month in your online CIS return submission that such written contracts exist. It is hardly surprising to learn the HMRC take a harder line when the discover you have been misrepresenting the true situation.

In consideration of the 'substance' of the working arrangement, we understand why the people who have to make decisions over employment status on a day-to-day basis become frustrated that there are no simple definitions to help them decide which of the three possibilities (employed, self-employed, or worker status) applies. HMRC guidance and case law requires employment status to be decided on a case-by-case basis, by holistically considering the application of a series of hallmarks of employment that have evolved over time. As the HMRC's opinion on employment status is arguably the only one that matters in practical terms of tax compliance, we suggest you read their tax manual guide esm0515 to gain an understanding of what is involved. The matter is further confused because deciding employment status for employment law purposes (see ACAS) is different for tax-compliance purposes.

The HMRC provides a useful online, interactive, employment status checker. We recommend the engager completes an online assessment and prints and retains the results to justify their tax treatment of every contractor's engagement. Provided you can demonstrate you answered the questions honestly at the time, the HMRC claim they will honour the outcome. Whether this claim will be upheld in an HMRC investigation is open to speculation. It is the difficulty of proving the assessment was completed in good faith at the time when, with the benefit of hindsight, the accumulated historical evidence now available suggests the employment status was something other than what was originally decided.

We have been writing and lecturing about employment status for over 25 years, and it is arguable as to whether even the most honest and well-intentioned of people in business can ever be realistically expected to understand and correctly apply this complex branch of tax and employment law in practice. This leaves the door open for many people to inadvertently make the wrong decisions over employment status and expose themselves to the risk of suffering a subsequent HMRC investigation and an unwanted back-duty tax assessment.

It is unlikely a tax-compliance issue will arise if the same self-employed, individual contractor is engaged:

on an intermittent and non-regular basis
there is no mutuality of obligation for either the engager to provide work, or the contractor to supply their services
for a specific job at a specific location
for a specified short duration of time (days not weeks)
for a fixed fee for the job (not hourly or day rates)
on the basis they retain a high degree of control over how and when the carry out the job
… all the above are stated in a written and signed contract of engagement that specifically states the arrangement is one of self-employment

By intermittent, there are significant gaps between engagements. There are no established pattern to the engagements. There is clear evidence the contractor is in business on their own account, and is simultaneously carrying out work for many other clients. The kind of give aways that could compromise self-employment status, is when a review of the contractor's paid invoices reveal: an unbroken stream of sequential invoice numbers; they account for work carried out every day of the week; or a single invoice lists several different jobs obviously carried out over a set period. In isolation, such tells in the never-ending game of tax compliance may seem inconsequential and not worth the time to address. Taken together, however, they paint a different picture to someone looking to question a self-employment status. There is a reason why the HMRC insist accounting records must be kept for so many years.

Much is made of the need to have a right of substitution clause in an individual's self-employment contract. In 25-years of practice we have never seen the right of substitute ever having been exercised in reality. If you are heavily relying upon this particular hallmark to justify your claim to self-employment status, may we suggest you take expert professional advice sooner rather than later. It is too fragile a legal red-herring to rely upon in this situation.

The further the actual contractor arrangements you have in place strays from the above, the more likely you are storing up a potential tax-compliance problem that will come to light should you be unlucky enough to come to the attention of the HMRC further down the line.

We prefer to work with our clients to prevent tax compliance problems, and avoid defending a lost cause when the HMRC investigate a client's tax affairs. Prevention is always better than cure.