Tests of Employment

Regarding contracts, the company should have a contract and ensure that it is not a contract of employment. You should work and behave in a way that does not indicate employment otherwise the Inland Revenue will ignore the contract. The question of whether an employee is employed or self employed has to be determined on a case by case basis taking into account all of the relevant details. It is not simply a matter of running through a checklist and ticking off all of the relevant factors one by one.

The factors, which need to be considered, include most importantly

• control, and also include
• whether the person performing the services uses his/her own equipment,
• whether he/she hires his/her own helpers,
• what degree of financial risk he/she takes
• what degree of responsibility for investment and management he has and
• whether and how far he has an opportunity of profiting from sound management in the performance of his task.
  

Control

Control exists in employment and also self-employment but consider the following:-

• What is done
• Where is it done
• When is it done and
• How is it done?
  

It is the right of control over these aspects, which are an indicator of employment and not the exercise of control. In situations where the employer retains a high degree of control over the work being done and appointing its own manager to supervise the work of contractors working alongside and on the same terms as employees, it may be difficult to negotiate a contract in which the purchaser gives up the right to control the way in which the work is done.

Right of Substitution

The right to employ another to do the task of the contractor must be genuine. The substituted person must be answerable to and paid by the contractor. The right to substitute does not prove self-employment and the absence of the right does not disprove self-employment.

Financial Risk

An individual, who buys assets to be used in the business, bears overheads and risks getting no return for these outlays will be self-employed. In the service sector this may be difficult for a ‘one man’ company using the clients equipment, paying for its own training and without any ‘organisation’. However the provision of equipment by the worker may prove self-employment but the absence of the provision of equipment will not disprove self-employment.

In short term engagements it may be helpful to consider:-

• whether the worker has a business like approach to obtaining and organising their engagements and incurs expenditure such as office overheads on organising their workload,
• whether the worker is engaged for a specific task rather than being at the disposal of the client
• whether greater financial risk is borne because payment is made on invoice, so there is a risk of bad debts or late payment.
  

Expense Allowances

In calculating the ‘deemed salary’ paid certain expenses may be deducted. The following is a list of these:-

• travelling and related expenses
• employer contributions to approved pension scheme
• gross salary paid plus employer national insurance contributions on salary paid and any deemed payments
• 5% of gross income to cover running costs
• other relevant expenses such as insurance or professional indemnity premiums.
• Other expenses which the worker is obliged to incur.
  

Many employers hiring contractors through companies, not themselves affected by IR35 or the imposition of the ‘deemed salary’ rules, will encourage their contractors to continue to supply their services through a company, paying the contract sum on a gross invoice basis. Affected companies operating ‘Relevant Engagements’ will be deemed to have paid out all profits arising from the employment as salary on each 5th April; PAYE and NIC then being due.

The Deemed Salary Calculation

1. Total income arising from relevant engagements	X
Less:
2. Salary and employers NIC paid	X
3. Expenses allowable (NB! travel only allowable if wholly exclusively and necessary for purposes of employment)	X
4. Pension contributions (approved)	X
5. Other statutory allowables for employees	X
6. 5% of gross income figure	X
Total expenses	X
Net amount: deemed salary including employers NIC	X

The deemed salary will be deemed to be paid as salary, on which tax and NIC will be due. The employee concerned will declare this deemed income (whether paid or not) on his tax return and PAYE and NIC will be due on that sum. The deemed salary is treated as paid on 5 April each year (being the last day of the income tax year) irrespective of the company accounting period. This means that the PAYE and NIC are due for payment 14 days later, on 19 April, otherwise interest will accrue on the unpaid amount on a daily basis.

Limited Liability

Should the contractor company default on the payment of PAYE and NIC, and claim limited liability, directors should be aware that there are existing procedures to enforce PAYE liabilities on the employee who received the emoluments and in the case of NIC on any director of the company which fails to pay NIC due where the director is fraudulently or negligently involved in the non payment. It is also possible to obtain freezing orders over the directors personal assets to secure payment of NIC liabilities.

Corporation Tax, VAT and Company Law

The company will still be taxed on the net profit it makes in an accounting period. Deemed salaries in a tax year must be attributed to an accounting year.

The present proposals do not affect the VAT status of the company. Supplies being made will carry VAT as normal.

The deemed salary may cause the company to be without ‘distributable profits’ with which to pay dividends so the company will be prevented from paying dividends except out of past accumulated profits.

Companies may become insolvent because of the tax liabilities and directors should take account of the expense structure to enable the business to continue to trade.

One Man English Service Companies may be acquired online.

Regulation

Note that in certain categories of employment/self employment specific regulations provide that the worker must be subject to PAYE and NI. 

© Michael Reason LLM 2000-2004