This point may seem to be quite straightforward, but is in fact a highly contentious area of tax.
The key issue is whether someone is subject to payroll taxes “as if” they were an employee, regardless of the legal nature of the actual arrangement between them and the entity they work for. The outcome depends on whether the arrangement amounts to a quasi-employment relationship.
There are a number of factors which can point towards an employer/employee (rather than customer/supplier) type relationship, but it can often be very difficult to find a definitive answer. Where the facts are anything other than clear, the position needs to be carefully reviewed and managed on an ongoing basis.
The complexity increases yet further when a person provides their services through an intermediary such as a partnership, their own company (referred to as a “Personal Service Company”), or through a “Managed Service Company” (a company bringing together a number of individuals). In these cases, the contract is no longer between the end ‘customer’ and the individual; instead it is between the end customer and the intermediary.
The legislation covering this issue is very limited, and practice has largely developed out of case law and HMRC guidance (referred to as ”IR35”). Interpretations can obviously change over time, and the whole area of IR35 is regularly looked at by the Government.
It is therefore important to take advice in this area and to bear in mind that the IR35 provisions can result in greater tax liabilities than if the individual had been treated as an employee from the outset. There are also implications for the “employer” business, in the form of wasted time, professional fees and penalties, where it can be shown that an individual should have been treated as an employee.
We have extensive experience of this specialist area and have assisted contractors in reaching agreement with HMRC.
If you have any concerns about your status as a self-employed person you should contact us immediately