Determining Employment Status

It is important that the correct employment status is applied in each and every case.

Employment Status: What does it mean?

Employment status is the term used when looking to establish whether an individual is employed or self-employed. It is important to get this right as it affects the type of tax and National Insurance Contributions (NIC) that are paid and who is responsible for paying them. Getting it wrong can have serious financial consequences for the engager with additional tax, NIC, interest and penalties becoming due.

It remains the responsibility of the business engaging an individual to correctly determine the employment status position, not the individual.

Changes to the off-payroll working rules

From April 2021, the off-payroll working rules are expanding from the public sector into the private sector and will affect contractors who offer their services through a Personal Service Company (PSC) or partnership and who are working for a medium or large business end-client engager.  

The responsibility to establish the appropriate employment status position of the contractor for the particular engagement will move from their PSC to the medium or large business end-client engager.

The end-client engager may not be the business that actually pays the contractor’s PSC, for example in longer contractual chains where other intermediaries sit between the end-client and the PSC. However, it remains the responsibility of the end-client engager to determine the employment status position.  In these instances, the business that is responsible for paying the contractor’s PSC; the fee-payer, has to implement the employment status determination as advised by the status determination statement produced by the end-client.

The off-payroll rules place the liability with the fee-payer where the end-client has taken reasonable care in reaching the status decision even if HMRC later decide that the decision was flawed. As The Guild will be the fee-payer, we effectively stand between our clients and HMRC should they look to challenge the status determination and any resulting liabilities.       

How to determine employment status

Employment status is not a matter of choice for either the engager or the individual, rather it is a matter of fact based on the terms and conditions of the actual working arrangements in place.

To determine the employment status position, the engager will need to consider all the relevant factors of the working arrangement of the engagement, with the most important being:

  • is control exercised over the individual;
  • is there a requirement for personal service; and
  • is there mutuality of obligation (MOO) on both parties.

Additional factors to consider include, but are not limited to:

  • is there financial risk;
  • who provides materials and equipment;
  • who is responsible for correcting defective work;
  • is the individual part and parcel of the organisation; and
  • is the individual in business on their own account.

Once all the relevant factors have been established, the engager will need to consider the full picture and determine if the overall position is that the individual is in business on their own account (self-employed) or if the individual is working within someone else’s business (employed).

What help is available?

Whilst HMRC do have the Check Employment Status for Tax (CEST) tool, to assist with the employment status determination process, including the off-payroll working changes, this does appear to have limitations and many critics.

Furthermore, CEST is not able to provide an employment status determination in every instance, with the outcomes available being:

  • Employed for tax purposes or inside off-payroll working rules;
  • Self-employed for tax purposes or outside off-payroll working rules; and
  • ·         Undetermined. 

Ultimately, the completion of the CEST tool is not mandatory and the advice of The Guild is to be very careful if deciding to use CEST and ensure that the answers given reflect the reality of the working relationship and do not simply mirror any contract terms.

How we can help

Employment status compliance is one of The Guild’s specialisms and we only deal with skilled and experienced subcontractors that satisfy the requirements for self-employment status.  Working with The Guild removes your exposure to challenges from HMRC as the status risk sits with us and you will have the peace of mind that subcontractors provided are genuinely self-employed.

We have in-house experts including ex-HMRC Employer Compliance and CIS specialists who are able to navigate through the nuances within a working arrangement that could be missed by a tool such as CEST. Our processes will undoubtably ensure that the employment status position has been reviewed thoroughly and will also demonstrate that reasonable care has been taken in reaching the status decisions.

Working with The Guild and our dedicated compliance teams will help you reach an employment status decision based on all of the relevant factors. We are already working with our clients to assist them with the upcoming off-payroll working changes and have devised our own in-house off-payroll status determination process to assist with the new off-payroll rules.

GuildHUB is an information resource, provided free of charge by The Guild, for accounting professionals and their clients.  If you wish to contact The Guild, please email contact@trusttheguild.com.

The content of this article is for guidance only and shall not constitute advice. Please seek independent advice or contact GuildHUB for information about its services.

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