There can be savings, particularly for employers, if a worker can be paid as a self-employed person. This is particularly so in the construction industry where most workers are engaged by contractors as self-employed subcontractors.
What many contractors fail to realise is that they are required to reach a judgement on a worker’s tax status based on a rigid framework determined by HMRC. It is not sufficient to base this judgement on what produces the best tax and National Insurance outcome.
Getting this status issue wrong will likely result in an uncomfortable examination of engagement contracts by HMRC and expensive catch up payments if it is determined that certain self-employed sub-contractors are actually employees.
How then should a contractor make this judgement: employed or self-employed? We have listed below HMRC’s published criteria:
Common indicators of employment
- The contractor has the right to control what the worker has to do – where, when and how it is done – even if the contractor rarely uses that control.
- The worker supplies only his or her own small tools.
- The worker does not risk his or her own money and there is no possibility that he or she will suffer a financial loss.
- The worker has no business organisation, for example, a yard, stock, materials, or workers. (These examples are not exhaustive.)
- The worker is paid by the hour, day, week or month.
Common indicators of self-employment
- Within an overall deadline, the worker has the right to decide how and when the work will be done.
- The worker supplies the materials, plant or heavy equipment needed for the job.
- The worker bids for a job and will bear the additional cost if the job ends up costing more than the worker's original estimate.
- The worker has a right to hire other people who answer to him or her and are paid by him or her to do the job.
- The worker is paid an agreed amount for the job regardless of how long it takes.
To make a decision on an individual case, you will need to consider all the details, and your overall judgement should not rely solely on the above notes. Determining status can be a complex process and one that should be undertaken rigorously.