Tax

Tax for the self-employed

Apr 03, 2018
Following a personal service company case ruling by the HMRC, Geraldine Browne explains how businesses and the self-employed can avoid trouble in the future.
 
Employment status is never a matter of choice, it is always dictated by the facts and when the wrong tax is being paid, we will put it right.” This was the statement from HMRC following a ruling on a case of a BBC presenter paid by the BBC through a personal service company (PSC). The ruling made by the first-tier tribunal (FTT) was based on the judgement that, even though the individual was working under a PSC, she was not truly self-employed. 
We are seeing an increase in HMRC challenging contractor engagements across all sectors and industries. At the same time, we are also seeing an increase in businesses entering into such arrangements, particularly following redundancy situations where the employee is engaged under ‘contractor’ status. 
It is worth reviewing some of the key facts of this case as it impacts most businesses in determining if they are confident that their arrangements would stand up to the scrutiny of a HMRC review.
Before doing so, there is an important distinction to be made. This case involved the individual setting up her own PSC and, therefore, the payments were made to a limited company. The prevalence and popularity of these type of arrangements led HMRC to introduce IR35 legislation. The legislation shifted the obligation to review the employment status to the PSC. Therefore, the debate over this case has arisen because the liability fell on the BBC presenter who was encouraged by the BBC to enter into such an arrangement.

Key factors of the case

Substitution is a key factor in determining self-employed status. If (but not always) an individual is truly in business on their own account, they will have the ability to provide a substitute to carry out the contract. This was not the case for the BBC presenter who was prohibited from using a substitute to work. However, the absence of the ability to provide a substitute is not in itself the determining factor. HMRC will look at the facts of the case to determine in its entirety if it is that of a self-employed individual.
Another key factor in this case was the control element. The BBC had control over her services and she was restricted in providing services to other organisations without the consent of the BBC. She also had limited input into the editorial content of her work. The last main key factor to look at is the absence of financial risk. She was paid monthly, and the BBC was contractually obliged to pay the fees. It was not possible for her to make a loss.

CEST review

While these were the key facts in this case, there are others to be considered. HMRC helpfully provides an online check list, Check Employment Status for Tax (CEST). This is a useful starting point when reviewing self-employed/employee arrangements. It helps provide the answers to other questions in this case: does the individual appear in the internal phone list/company website? Are they provided with benefits and/or performance bonuses? What is their title on their business card? Have they previously been an employee and, if so, what has changed because of their new employment status?
All these questions need to be considered when reviewing the contractors engaged by employers. HMRC is increasing its reviews across sectors and has recently turned its attention once more to the construction industry, inviting businesses to carry out the CEST review and provide their responses to HMRC. 

Conclusion

While HMRC has stated that “employment status is never a matter of choice”, businesses may not agree. The world of how we work has changed and the relationship between employer and employee is no longer limited to the traditional superior/subordinate roles. There is a school of thought that, in the future, everyone will be self-employed at some stage in their career. Employers are increasingly incorporating the self-employed into their business and HR strategies. This cannot be regarded as bogus self-employment but rather, engaging with the self-employed for sound commercial reasons. The key is to ensure that they are doing so while adhering to the legislative requirements.
 
Geraldine Browne is Tax Director at BDO Northern Ireland.