Employed or self employed 17th March 2014

Posted in: Business Tax

If you run a business and you have people who work for you, it’s important to be clear about whether they are employed or self employed. Some of these are employees. They have an employment contract, you pay them wages and you deduct taxes under PAYE.

Then there’s a few other individuals who also do work for you. You don’t have a contract of employment with them and you don’t deduct taxes or NI under PAYE – you pay them gross. They say they’re not employed, but self employed. But are they?

This is an important topic, because if you are in this situation and you get it wrong it could be very costly.

Just because you don’t have a contract of employment with these individuals and you pay them gross doesn’t mean that HMRC will not deem them to be employees. If that happens, then the payments you’ve made to them could be deemed to be net payments and HMRC will ask you for the tax and NI.

To determine whether an individual is employed or self employed, HMRC will apply a number of tests and look at a range of factors.

These are just some of the tests:

  • mutual obligations – are you under an obligation to provide work and is the individual under an obligation to perform it?
  • integration – is the individual integrated into the workplace? Do they have their own desk, designated computer and access to normal employee facilities?
  • control – do you control the individual, telling them what to do, how to do it and when to do it?
  • equipment – does the individual provide their own tools and equipment or do you provide them?

Looking at the situation from the perspective of the individual we look at other factors, such as:

  • financial risk – if the individual’s work is substandard, do they have to rectify it at their own cost?
  • paymasters – how many paymasters does the individual have, one or many?
  • substitution – can the individual substitute someone in their place?

No one factor on its own is enough to decide one way or another. HMRC will take a balance of probabilities approach. It’s necessary to look at each case individually to make a determination.