The BBC and the Government have recently been criticised for their use of 'off payroll contracts' to employ staff. Organisations with similar arrangements could be scrutinised by HM Revenue & Customs.
What is an "off payroll" contract?
As the name suggests, this is a contract used to engage staff who are not paid through the payroll like ordinary employees and therefore are not subject to deductions at source for PAYE income tax. Such individuals must account for their own income tax on a self-employed basis and are subject to lower National Insurance Contributions.
Where an individual is genuinely in business on their own account, for example, they provide their services as a consultant through their own individual company to different clients, they will legitimately be subject to different legal and tax treatment. This type of arrangement is more prevalent in certain sectors such as journalism and IT.
The arrangements recently criticised, however, are those where individuals are not truly self-employed but are, for all intents and purposes, employees.
The individual (and employer) under an "off payroll" contract contribute less tax and National Insurance Contributions, as no deductions are made at source through PAYE.
As the Government has been clamping down on tax avoidance in all quarters it is somewhat ironic that potential tax abuse has now been uncovered within its own ranks.
How do you distinguish who is really an employee?
The test for employment status is notoriously complex and the results can be uncertain. To complicate matters further, a person could have a different status for tax purposes than for employment rights purposes, for example, HMRC could accept that they should be taxed on a self-employed basis but an employment tribunal may categorise them as workers entitled to certain employment protections e.g. the national minimum wage and paid annual leave.
The following factors may help in identifying whether an individual is an employee or not:
- Mutuality of obligation: Does the employer provide work to the individual and is there an obligation on the individual to accept it when it is offered?
- Personal service: Is the individual expected to provide his or her services personally or can they choose to send a substitute to carry out the work?
- Control: Does the employer exercise a degree of control over the employee and how they carry out their work, for example, dictate the hours of work, equipment used and policies, procedures and rules applied to the individual?
If the answer to all the above is yes, then it is likely that an employment relationship between the employer and the individual exists.
Factors which may point away from employment and towards a genuine self-employed status include:
- Where the individual takes financial risk, i.e. they have the opportunity to profit but also bear the risk of loss.
- They supply their own equipment for work.
- They work for more than one employer.
- They are not considered to be part of the employer's undertaking, for example, they are not included in internal telephone directories or budgets.
- They have real independence from their payer and can control, to a large extent, how and when the work is carried out.
Given the Government's focus on increasing tax revenues, we recommend employers audit employment arrangements and, in particular, review any individuals currently engaged on a self-employed basis to determine whether there is a risk that their status could be challenged by HMRC.
Unfortunately this is not an exact science, each case will turn on its own facts and cases at the margins will always be difficult to decide. Ultimately only the Courts can provide a final adjudication.
Shoosmiths' employment team can help you indentify whether an individual is an employee or genuinely self-employed. Please contact the person you normally deal with or the author of the article, Bhavika Badola, if you require assistance in this area.