Employment News: Avoiding the wrath of HMRC: when is a self-employed worker actually an employee?

The IR35 rules were introduced to end the perceived evasion of Income Tax (‘IT’) and National Insurance Contributions (‘NICs’) by the artificial creation of self-employed individuals who perform services through an intermediary (often a company owned and run by the individual) but who are, in fact, employees.

The risks associated in incorrectly determining status are (a) HMRC will require back pay of IT and NIC and can order the individual, the intermediary company and even the client/employer to pay (b) The individual asserts he is an employee and sues the client/employer in the Employment Tribunal for unfair dismissal and/or reduced pay etc.

The key tests the HMRC use in determining such individuals’ status are:

1. Personal service/right of substitution: If the arrangements specifically require the named individual to carry out particular tasks they are more likely to be an employee. If, however, the individual has an unfettered right to provide a substitute to carry out tasks (or hire a helper to assist with tasks) they may be deemed self-employed (Synaptek Limited v Young, 28 March 2003). Recently the Employment Tribunal held that even where the right to substitute was contingent upon the client/employer’s consent it could still demonstrate that the individual is self-employed (ECR Consulting Ltd v Revenue & Customs, 11 May 2011).
2. Mutuality of obligation: There ought to be at least an obligation on the individual to carry out work and on the client/employer to pay, for an employment relationship to exist. In Synaptek, it was held that a minimum notice clause imported some kind of mutuality of obligation. The absence of mutual obligations was determinative in Ansell Computer Services Ltd v Richardson (29 July 2004).
3. Right of control: For a relationship of employment to be deemed the client/employer must have the right of control. However, there is no need for an employer to exercise such right (where individuals have a particular specialism they will often be employed with minimum supervision- Island Consultants Limited v Revenue & Customs, 5 July 2007). The right of control is often demonstrated by an individual having set weekly hours. In ECR Consulting the individual relied partly on her varied weekly working hours to argue (successfully) that she was self-employed.
4. Equipment: Where an individual provides their own equipment they may well be deemed self-employed.
5. Financial risk and opportunity to profit: Where an individual bears financial risk (e.g. investment in training or quoting a fixed price for the completion of a job) and/or their financial gain depends on the minimising of overheads etc, then they are more likely to be deemed self-employed.
6. Genuine part of the organisation: Where, for example, an individual manages other employees and has an integral role (s)he will be more likely to be an employee.
7. Employee-type benefits: Benefits like paid leave, access to a company pension scheme and access to canteen and parking facilities are obviously indicative of an employment relationship.
8. Termination provisions: HMRC have set out that specifying notice periods (unless terminating for serious breach) may indicate an employment contract. In ECR Consulting the tribunal noted (in holding that the individual was self-employed) that the termination arrangements were inconsistent with an employment relationship.
9. Mutual intention: HMRC suggested this may be considered when the nature of the relationship remains unclear having considered other factors. However, the tribunal in ECR Consulting decided that the parties’ intent ought to constitute a stand alone factor. Either way, the label adopted by parties will not be the single determining factor (Battersby v Campbell, 21 September 2001).
10. Other factors including ‘personal’ factors (the individual’s approach to their ‘business’) and length of engagement (open-ended contracts tend to indicate employment) may also be considered. The fact that another non-intermediary party is involved (e.g. an agency) will not preclude a finding that the individual is an employee (FS Consulting Ltd v McCaul, 22 September 2002).

Conclusion

It is important to note that HMRC and the Employment Tribunal have differing but overlapping tests when determining the status of an individual. Unfortunately in this area the cases are very fact-specific, making it difficult to ascertain a general rule.

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