04 Apr 2012

So you think they are self-employed?

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If you engage self-employed sole-traders you need to be 100% confident that you could successfully argue a challenge by HMRC even against the most stubborn HMRC officer.

If HMRC conduct a routine compliance review on your company they will almost certainly question whether the self-employed individuals you engage should have been employees.

We have listed below a few of the common reasons companies put forward as to why the individuals they engage are genuinely self-employed, after each one we have put the kind of response you could expect back from a Status Inspector…

They work for other companies, not just mine!

So what, many employees have more than one job. Just because they work for others as well does not stop them being an employee of your company.

This was considered an important factor in the well-known case of Hall v Lorimer [1993] but in that case the individual worked on 120 to 150 different assignments during the course of the year. Unless the same applies in your relationship, you may need to find a different argument.  

They only work for me for short periods of time!

A company could have an employee for a day, just because they are short engagements does not preclude them from being employees.

They invoice me!

This is merely a reflection of what you and they perceive their employment status to be and does not add any weight to them being self-employed.

They are registered with HMRC and therefore accepted by HMRC as self-employed!

HMRC have a system whereby an individual can register as self-employed. This does not by default mean they are self-employed when you engage them, it simply means they have the ability to self-assess. Every engager has a responsibility to ensure the way in which they engage people is correct and accurate.

They have their own insurance?

Excellent, it is good that they have their own insurance but this does not make someone self-employed. There are no status cases which conclude an individual was self-employed just because they have their own insurance.

They come and go as need be and we don’t have to give them any work?

 An employee can quite easily be taken on, on a short term, flexible or a zero hour contract. Why is this any different?

The obligation to offer and accept on-going work has been considered many times in the courts and cases such as Prater v Cornwall County Council, Delphi Diesel Systems v Stephenson and Dragonfly all demonstrate this is of little, if any importance.

We don’t pay them holiday pay!

The entitlement to holiday pay is the result of a ‘worker’ or employment relationship, not a factor which determines whether someone is an employee in the first place.

They can send substitutes in their place?

Whilst this can be helpful, the occasional use of a substitute does not stop them being an employee (a long established case law principle most recently supported in 2011 in the Upper Tier Tax Tribunal in Weight Watchers v HMRC).

Employees regularly get other employees to fill in for them if they are not able to work, the use of a substitute will normally be no different.

HMRC’s Employment status Indicator (ESI) said they were self-employed, or a previous review concluded self-employment.

HMRC’s ESI is simply a tool to provide companies with a guide to employment status. HMRC nor the tribunals are bound by this tool as it is for guidance only.

A previous HMRC review confirming self-employment will also not be binding on HMRC as the nature of the relationship can change at any stage. It is also important to look at whether HMRC previously confirmed self-employment or agreed not to pursue this issue further (without making a decision either way).

Do you have any doubts?

If the above answers stumped you and you would struggle to come back with a decent counter argument, the chances of you getting through an HMRC interrogation unscathed are slim. Bear in mind for the above you have time to consider a response whereas face to face with an HMRC Status Inspector is a different kettle of fish where they can keep pushing the point further and further until you are backed into a corner and say the wrong thing. At that point they will make a note of what you have said and rely on it as valid evidence at the tax tribunals – not a good situation to be in!