Employees vs Self-employed workers – Tax considerations

Ensure you are classifying workers correctly, as it can have significant tax consequences.

Many businesses will usually have several directly employed staff on their payroll. However, it can also occur where someone that is self-employed, is doing regular work for the business, and raising invoices for their work.  If you have this situation in your business, the onus is on you to determine whether the tax treatment is correct, because it may not be a foregone conclusion that a self-employed worker is actually self-employed.

What are the key differences that distinguish between self-employed and employed?

• Someone is classed as self-employed if they run their business for themselves and take responsibility for its success or failure. 
• Self-employed workers are not paid through PAYE, and they usually raise invoices for work they do for the company
• Self-employed workers don’t have the same rights and responsibilities as employees. 
• Employed staff are on your payroll, and are paid with PAYE and NIC deducted
• Employed staff have a number of statutory rights and entitlements

You must get the classification right, due to the fact that it affects their rights and entitlements at work, and also changes your responsibilities. 

What are the off-payroll working rules?IR35 is a tax legislation in the UK aiming to close a commonly used loophole in the tax system where workers are able to pay less tax by setting up their own limited company, sole trader, or partnership than they would if they were directly employed on the payroll. The rules are designed to ensure that where appropriate, self-employed workers generally pay the same income tax and national insurance as employees. 

Who do these rules apply to? 

• A worker who provides their services through their own intermediary (e.g. sole trader, or often a limited company) to a business
• A business who receives services from a self-employed worker through their intermediary
• An agency or other supplier providing workers’ services through their intermediary

It is important that if you do have people working for you on a self-employed basis, that they genuinely meet the self-employed criteria and tests. If these tests are not met, then it is likely that these workers may be ‘deemed to be employed’ for tax purposes and it is then the employer that will have to pay the associated PAYE tax and national insurance, not the employee/worker.  

Therefore, it is crucial that as an employer/business owner, you get it right and reassess current situations on a case-by-case basis against the current rules. HMRC often does spot checks on companies to ensure that they are not using hired contractors, but treating them like employees.  These are treated as disguised employees, and HMRC will ensure that you, as the employer, pay the unpaid taxes. 

How can I check whether HMRC would regard a worker as employed or self-employed?If you are unsure on the classification of a worker, HMRC has a tool which you may find helpful, you can access this here - https://www.gov.uk/guidance/check-employment-status-for-tax. We also recommend talking to an accountant or lawyer to ensure you are treating these situations correctly to avoid being fined or any further action being taken.

What are your responsibilities as the deemed employer?If the ‘off-payroll’ rules apply, and you have a situation where a self-employed worker would be deemed to be an employee under these rules, then you have many statutory responsibilities as a ‘deemed employer’:

• Calculate the deemed direct payment to account for employment taxes and National Insurance contributions associated with the contract
• Deduct those taxes and employee National Insurance contributions from the payment to a worker’s intermediary
• Pay employer National Insurance contributions
• Report to HMRC through Real Time Information the Income Tax and National Insurance contributions deducted
• Use the ‘off-payroll worker subject to the rules’ indicator in PAYE Real Time Information 
• Apply the Apprenticeship Levy and make any payments

For further guidance on your responsibilities, click here.

Are there any other considerations?If you have someone working for you who is genuinely self-employed, it is also important that you consider whether it is better to employ them. If your company is engaged in R&D activities that qualify for R&D tax reliefs, and the work that this self-employed subcontractor is doing relates to these qualifying activities, then only 65% of the subcontractor costs can be claimed for R&D tax relief.  However, in some situations, if they are directly employed, there may be a higher percentage of the cost that can be claimed on qualifying R&D activities, but this does depend on several important factors.

Due to the recent changes within the R&D rules, including restricting relief for subcontractors located overseas, it may be beneficial to assess which is the best option, whilst taking into account all of the statutory and practical considerations. For more details on the recent R&D changes see here - https://www.oldfieldadvisory.com/articles/2024/05/622-overview-of-the-key-rd-changes-from-april-2024

If you are unsure about the classification of a worker, HMRC has a tool that you may find helpful, you can access this here - https://www.gov.uk/guidance/check-employment-status-for-tax

We also recommend talking to an accountant or lawyer to ensure you are treating these situations correctly to avoid being fined or any further action being taken.

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Please note: This article is provided for information only and was correct as at time of writing (22/08/24). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.