On The Spot Blogs
Uber reaction - How should businesses react to recent employment law cases?
It's important to remember that many recent employment law cases ruled on employment law. There's no requirement for HMRC to follow these findings for tax purposes but you expect they'll be reviewing their position.
Along similar lines, there have been some recent HMRC 'IR35 status' tribunal cases where (usually) one-person limited companies have had mixed success as to whether they are an employee of their clients.
Why does it matter?
As a business owner, HMRC may decide that your longstanding sub-contractors are actually your workers or employees for tax purposes and should be subject to higher rates of national insurance. This is in addition to providing workers' rights under employment law.
How can you be self-employed, a worker or an employee?
It used to be simpler to know whether you're taking on an employee or a self-employed sub-contractor or supplier. The EU introduced a new definition of worker, a sort of hybrid between the two, which has caused some confusion.
What's the point of being a worker?
A worker enjoys many rights, just not quite as many as an employee. For example:
- Statutory maternity pay but NOT statutory maternity leave
- Statutory paid holiday but NOT the right to time off for emergencies
- Protection against unlawful discrimination but NOT protection against unfair dismissal
So my self employed sub-contractors could win an employment law case, be classed as a worker, enjoy all the benefits but not necessarily pay any additional national insurance?
Yes. In addition, you'd be required to include workers in pensions auto-enrolment paying up to 3% employer pensions contributions.
HMRC might also require me to pay employer's national insurance (13.8%) and deduct employee national insurance (12%) and income tax from the payments I make?
Does this additional national insurance buy the worker any more benefits?
Not much. Assuming the worker already paid self employed Class 2 national insurance, the additional benefit is an enhanced job seeker's allowance, if he needs it.
That doesn't make much sense. I thought national insurance was a system you paid into to buy extra benefits.
The state pension will usually be the most valuable benefit, but this is currently available anyway by paying £153.40 per year self employed Class 2 national insurance.
What should I do?
- Review all your contracts and practices with your self employed sub-contractors and suppliers to establish whether in the light of these recent tax cases they may be seen as workers or employees.
- Use HMRC's new Employment Status Tool to see whether HMRC agrees that your sub-contractors are self employed or not.
- If not, don't necessarily rely on HMRC's conclusion which ignores a vital Mutuality of Obligations (MOO) test.
- Decide whether your contracts need to be amended to reflect your business arrangements more accurately or if you need to set up new employment contracts.
How does this apply to my limited company which provides services to my clients?
If, through similar tests, you were found to be an employee of your client and caught within the 'IR35' rules, your company is obliged to pay PAYE and Class 1 employee and employer national insurance. As this wouldn't have been factored into your pricing, this will make a big dent in your profits.
What should limited company contractors do?
You can follow similar advice to above checking the details of your contracts and practices with your clients, as the points at issue are the essentially the same.
This is a developing area of tax and employment law, so please check with your advisers before making any decisions.