Employee or subcontractor?

Employee or subcontractor?

The recent change to IR35 legislation over work being carried out for the public sector has been among a number of items in the news bringing attention to whether someone is a member of staff or a contractor. Recently, a Tribunal decided that Uber drivers were staff and another tribunal decided that Deliveroo delivery drivers were self-employed.

As time goes on, it’s becoming increasingly difficult even for the most diligent company directors to know truly what the difference between an employee and a subcontractor is. However, that looks like a decision you’ll have to make very soon yourself about your contractors, under threat of penalties.

The problem – loss of tax

On Friday afternoon, a member of staff signs off on his last shift. On Monday morning, that same person comes in, works the same hours, does the same job, but he is now a contractor.

For the contractor, his new limited company shell means no deductions for income tax and National Insurance. The cheaper option of salary versus dividend is now the way they’re paid. For the company, no 13.8% National Insurance Employers’ Contributions, pensions contributions, and employment law.

Everyone wins. Except HMRC who are potentially £10,000s down.

The solution – exacting definitions of employment

The rules over who is an employee and who is a subcontractor have been tightened up greatly in the last 20 years.

There are now three status tests by which HMRC decides whether someone is an employee or contractor:

  • control – the level of interference from the company over how a job should be done. The self-employed usually receive much lower levels of input than the employed
  • personal service – is the worker providing just the services of himself or can he substitute someone to do the work instead?
  • basis of payment – often cited by HMRC as the key factor, does the job have a fixed price (or set hourly rate) and must the contractor absorb any costs in providing that service himself?

The new problem – not enough inspectors to do the job

In 2003/2004, there were just over 1,000 investigations into whether someone who claimed themselves to be a contractor was an employee or not.

By 2013/2014, that number had slipped to 192. No more recent figures have been published however, given the increasing cutbacks in HMRC’s staff numbers in the intervening period, there is no strong reason to suspect that the number of investigations have been climbing.

The new solution – just classify everyone as employees anyway

From April 2017, a change in the law meant that contractors were no longer in charge of declaring themselves as contractors. In the public sector, it was now the people who were contracting you who decided whether you were an employee or not. The contractor has no say in the matter anymore.

There are multiple news organisations reporting online that this new public sector rule will be applied to all private sector contracts from April 2018, although others believe that April 2020 is a more likely date of introduction.

Since the introduction of the public sector rule, Mel Stride, the financial secretary to the Treasury, speaking to the Financial Times, said that there were an additional 90,000 contractors more than expected taxed as employees in the public sector since April 2017.

The future

There seems to be a concerted government drive now to make the taxes that the self-employed pay closer to the taxes paid by those on a salary.

To make sure you’re paying the lowest possible legal rate of tax, keep your records up to date on Xero and keep in touch with your accountant here at Kelsall Steele.