Self-employed or a disguised employee?

So what is a disguised employee?

You will have all read the case recently of BBC presenter Christa Ackroyd and you may also be aware of the cases against Uber, Deliveroo, Addison Lee and Pimlico Plumbers where self-employed contractors have been deemed or thought to be employees. As a result of these cases many smaller employers have been left anxious about how they can avoid the problems these large companies have faced when they often genuinely cannot afford and do not truly employ staff.

Ackroyd has been held liable for tax in excess of £400,000 because the Courts considered her to be an employee of the BBC despite her being paid through a separate limited company. This is a significant victory for HMRC as it is the first time in seven years they have won a claim related to IR35 – a tax law which aim to combat tax avoidance by workers who supply their services via an intermediary, but are to all intents and purposes employees. These workers are known as ‘disguised employees’.

What is a ‘disguised employee’?

This is where an employer takes on employees on a self-employed basis rather than using an employment contract. Generally, this can save the employer a significant amount of money as they do not have to pay Employer’s National Insurance Contributions or use payroll software. Additionally, they usually do not offer employee rights or benefits, such as maternity/paternity leave or sick pay. Often, the self employed workers can make tax savings too, but in return they lose many benefits and rights.

Consequences

If a worker is found to be a ‘disguised employee’, employers may face financial consequences. The employer will have to pay income tax and National Insurance Contributions (NICs). There can also be additional fines if the worker pays late. These can also be backdated.

To ensure you are compliant as an employer or you are secure as a self-employed consultant, there are some key measures you should adopt:

• A good contract will comply with all the legal/tax requirements to ensure that you satisfy the rules on level of control, who pays tax etc. It should also have an indemnity clause if the worst happens and HMRC come after you or the business for a contractor’s taxes.
• You should make sure you receive invoices and have a clear project based on an hourly or daily payment system that combats any concern that the person is actually an employee.
• Where appropriate you should make sure workers have professional insurance and bring their own or rent equipment.
• Lack of work or the end of a project should enable the contract to lapse or be terminated.
• Workers should be permitted and not restricted from earning income elsewhere or be forced to be exclusive to one business
• Companies, where possible and suitable, should avoid seeking to enforce working times, uniforms or employee policies on workers.
• No holiday or sick pay should be applied.
• Workers should be able to be substituted for someone else if suitable.

Ultimately, HMRC and the Courts take into consideration the actual facts of the situation to determine the relationship between the parties.

*Karen Holden is Founder of A City Law Firm.

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