Why do I need to check if someone is genuinely self employed or should be employed?
If you appoint a contractor or subcontractor to work with you, and they are not genuinely self-employed, you can become liable for the tax and employers’ national insurance of that person. Simply registering with HMRC as self-employed Is not enough. HMRC will check if the way the person works is in line with being self-employed.
How do I work out if someone is self-employed?
HMRC link provides details at https://www.gov.uk/employment-status/selfemployed-contractor. Each point to consider is listed below:
The contractor/subcontractor has a business for themselves and must consider the profit or loss of that business. Their turnover (sales) is not just made up of the hourly or contract rate you pay them. An employee has a gross income that is only made of the rate they are paid by 1 or 2 employers.
They have the option to decide what work they accept, when, where and how they complete the work. It is not like an employee who must accept the work given to them by their employer.
They can hire someone else to do the work and do not have to complete the work themselves. An employee can not send a replacement into work if they cannot attend.
They are responsible for fixing unsatisfactory work in their own time. An employer is responsible for the end work an employee produces. An employer can not ask an employee to correct errors in their own time.
They provide their own business assets, tools, and equipment. An employee is not expected to provide their own computer for work.
They can work for multiple clients and do have or are building a portfolio of multiple clients. An employee may have 1 full time job or a few part time jobs but this is much less than the range of clients a genuinely self-employed person would have, over the course of a couple of years.
You can get help checking the self-employed status by using HMRC tool https://www.tax.service.gov.uk/check-employment-status-for-tax/disclaimer
Example of genuinely self-employed versus not genuinely self-employed:
Example 1 Judith has 2 clients.
- Judith is not on payroll and is treated as self-employed. She is responsible for her own tax and national insurance.
- She works for 2 clients only.
- She must do 15 hours per week for the first client Monday to Wednesday and 10 hours per week for the second client Thursday to Friday.
- If Judith cannot complete the work, she cannot send someone else to complete the work for her.
- Judith is expected to work the above days and cannot change her days or decide not to complete the days on some weeks.
- Judith is expected to fix errors in her own time.
- Both clients provide all the tools that Judith uses. For the first client she works in their office and for the second client she works from home.
Although Judith is set up as self-employed, she is behaving and being treated as an employee and therefore has 2 part time jobs and not a genuine business. Each client should appoint Judith as an employee paid through PAYE.
Example 2 Helen has multiple clients.
- Helen is not on payroll and is treated as self-employed. She is responsible for her own tax and national insurance.
- She has multiple clients and is free to sign more clients.
- Some clients are serviced in their offices, but most clients are serviced in Helens own office at home. Helen decides when she will visit the office of any client.
- If Helen cannot complete the work, she can appoint a colleague to complete the work instead.
- Helen must complete certain tasks for each client but how, when and where she does them is up to her. She does not have to accept the work.
- Helen is expected to fix errors in her own time.
- Helen provides all her own tools. She also has other costs such as telephone/stationery etc that she must pay for from the income she receives from her clients. She is not reimbursed for every expense, so she must consider this when she gives a quotation to a potential client.
Helen is genuinely self-employed.
What records should I keep showing I have checked the self-employed status of a contractor/subcontractor?
Although at the time of writing this blog there is no need to keep an SDS report as there is for someone who works for you through a limited company or agency (see our blog https://bit.ly/3lFwX4f ). It is still a good idea to be able to show you have considered and agreed the above points within the contract between you and the contractor/subcontractor.
What are my next steps?
Step 1. Consider everyone who works with you, who is not on payroll. If they are coming to you from a limited company or agency, follow the steps in our blog https://bit.ly/3lFwX4f. If they are coming to you as a sole trader or partnership, make sure the contract between you considers all the points mentioned above. If you are unsure of the self-employed status, use the HMRC tool to help with your decision https://www.tax.service.gov.uk/check-employment-status-for-tax/disclaimer
Step 2. If you find someone who is not on your payroll but should be, make sure the person is advised they should be on payroll and agree how you both move forward.
Step 3. Keep your payroll advised of any self-employed person who is to be added as an employee.
If you need any further help, please get in touch. We are here to help.