Self-employed staff – are they still a risk to your business?

A review of IR35 in paving the way for a tax crackdown in light of HMRC’s landmark win against BBC’s Christina Ackroyd

We have all read the challenges made against Uber, Deliveroo, Addison Lee and Pimlico Plumbers by members of staff. The issue is not new and boils down to whether certain self-employed staff should be considered as employed (and subject to employers NI). There is also the question of whether they should then have employment rights and benefits. We watch the numerous cases and appeals with great interest and follow the developments and the implications they have on employment law.

There is also the case of the BBC presenter Christa Ackroyd. Ackroyd has been held liable for tax in excess of £400,000. This is because the Courts considered her to be an employee of the BBC even though her services were being paid through a separate limited company. This is not a novel issue. It is one which has hit the IT industry particularly hard over the last couple of decades. However, this is being seen as an important victory for HMRC as it is the first time in 7 years that HMRC have won a so called IR35 claim.

What is IR35?

The tax rules that govern this situation are called IR35. The name comes from the fact it was published by the then Inland Revenue – now HMRC. It is a tax law which came into force in April 2000. The aim was to combat tax avoidance by workers who supplied their services via an intermediary, usually a limited company, but who would be an employee if the intermediary was not used. Such workers are known as ‘disguised employees’ by HMRC.

What is a disguised employee?

This is where an organisation engages workers on a self-employed basis, usually through an intermediary company, although not all the time, rather than using an employment contract. This set up is often used as it allows the ‘employer’ to save a significant amount of money. They do not have to pay employers’ NICs or use payroll software to deduct and account for PAYE. Additionally, it also means they usually do not offer any employment rights or benefits such as holiday, maternity / paternity leave or sick pay.

Employers also do not have to concern themselves with unfair dismissal claims or redundancy payments. They simply serve notice if the project has come to an end or they no longer require the person’s services. Often the employees can make tax savings too, but some do lose out on the rights and benefits they would normally wish to have or be afforded.

Changes to IR35

New rules came into force on 6^th April 2017 regarding the assessment process for IR35. These were to determine whether a contractor working via a services company for a public-sector client fell within IR35. The changes now see sector organisations assume responsibility for deciding whether or not limited company contractors should be taxed in the same way as salaried workers where this responsibility previously laid with the contractor themselves.

Significance of IR35

If a worker is found to be a ‘disguised employee’, in other words contractors who do not meet HMRC’s definition of ‘self-employed’, the financial impact of IR35 can be significant. The result is that they will have to pay income tax and National Insurance Contributions (NICs) as if they were employed. This can reduce net income by up to 25%. HMRC can also come after the employer for the money that should have been deducted at source. Additionally, there may be interest and penalties for late payment.

Christa Ackroyd

The significant financial consequences of being caught by IR35 can be seen in respect of Christa Ackroyd. The UK tax tribunal ruled on 15 February that her contract with the BBC should have been subject to IR35 legislation and that she was in fact a ‘disguised employee’. Although the judge ruled that she had not intentionally avoided tax, she suffered significant financial consequences.

Some of the main indicators in her case which led to the Court ruling she was a ‘disguised employee’ was that that her role was continuous and steady, that the BBC had ultimate say over what services her limited company would provide, and that her contract restricted her from providing services to other companies.

Implications of the case

It is highly probable that we can expect a wave of litigation to result from similar cases and more and more organisations to be investigated concerning the contractual arrangements and status of its employees. Reports have already revealed that several other BBC engagements are under investigation.

So how do you as a business genuinely determine whether a person should be an employee or a self-employed contractor, subcontractor or consultant?

There are some measures you should have in place prior to starting the relationship:

1. A good contract will have all the legal / tax requirements to ensure that you satisfy the rules on substitution, level of controls, who pays tax etc. It should also have an indemnity if the worst happens and HMRC come after you as the business for a contractor’s taxes. Substitution is a key aspect as a self-employed person/company/contractor must be able to send in someone to do the work, in the event that the leading contracting person themselves cannot attend. This shows a genuine service led arrangement. So even if the contract is with X and Y, Y must be able to send in a stand in or one of its agents to perform the contractual duties to show that X is not controlling the activities of Y to the extent they are de facto an employee.
2. A good contract will seek to hold you harmless, as much as possible, regarding tax implications.
3. You should make sure you receive invoices and have a clear project based or hourly or daily payment system that combats any concern that they are actually employees.
4. Where appropriate you should make sure they carry their own professional insurances.
5. Staff should bring their own or rent equipment.
6. Lack of work or end of a project should enable the contract to lapse or be terminated
7. they should be permitted and not restricted from earning income elsewhere or be forced to be exclusive to your work force.
8. You should not, where possible and suitable, seek to force working times, uniforms or employee policies on them.
9. Do not pay them holiday or sick pay.
10. Allow them to be able to substitute themselves for someone else if suitable.

Ultimately HMRC and the Courts look at the actual facts of any situation to determine the relationship between the parties. It is important you keep clear and accurate records and remain careful that you do not blur the lines.

In the meantime, if you can’t wait, you can contact us directly for impartial advice by visiting our website http://www.acitylawfirm.com/ or emailing [email protected]

Karen Holden is the Managing Director & Founder of A City Law Firm who practise both commercial law and litigation, having been admitted to the roll in 2005. If you require further advice or assistance, please do not hesitate to contact [email protected]

A City Law Firm Limited is a leading entrepreneurial law firm in the city of London, with a dynamic and diverse team of lawyers. It was awarded most innovative law firm, London 2016 and Business Law firm 2017. They specialise in start-up business law, the tech industry, IP and investment