If you’re a business that uses freelancers, you should be careful to nail down their employment status from the start.
Some of the key issues to consider are illustrated by a recent tax case taken to the First-Tier Tax Tribunal (FTT) – the case of Phillips v HMRC 2021 (P v HMRC).
At a time when HMRC frequently challenges claims by individuals to be self-employed freelancers, rather than employees, the case of P v HMRC found HMRC arguing that P’s status for the work he did for City & General Direct (C&G) was that of a self-employed freelancer and not an employee. P disagreed and appealed to the FTT.
Despite several factors pointing to P’s status as an employee, the FTT confirmed HMRC’s decision that P was self-employed. The key factor in this case was the lack of control and supervision exercised in practice by C&G over P’s work.
Working arrangements in practice
The background to this case involved P working for C&G as a developer of a medical negligence insurance product. P had expertise in the insurance sector and was engaged by C&G after a series of negotiations mainly via email. P and C&G had discussed his working arrangements at length and draft contracts were drawn up, although they were never signed.
Signed final contracts might have helped P’s case but they weren’t a key factor in this case. Written contracts are advisable and are useful evidence of a worker’s status, but HMRC will also look in detail at the actual working arrangements in practice.
It was eventually agreed that P would be paid on a commission only basis, with no salary. The absence of a regular salary does not in itself prove that P was not an employee.
P’s normal place of work was also considered by the FTT. P normally worked from home, but he also worked from the Lloyds building in London and at the offices of various insurance companies he was negotiating with. But he had no desk at C&G.
However, C&G did provide him with a computer, other IT equipment and business cards giving him a title of “sales director”. He also had use of a company credit card. All of these factors are usually indicators of employment. But in this case, they were found to carry less weight than the issue of control and supervision.
No control and supervision
The key to this case was the issue of whether C&G had control over when or how P worked for them. The FTT decided that it did not. Neither did it set formal processes to review P’s work or obtain progress reports, although P did provide such reports at irregular intervals.
This lack of control and supervision combined with other less significant factors, such as C&G did not allow P to enrol in the company pension scheme and give him paid holidays, were sufficient for the FTT to conclude that P was acting as a self-employed freelancer, and not as an employee of C&G.
Lessons for businesses
In the end, this case is about who is responsible for income tax and NICs. Had the decision gone the other way, HMRC would have issued C&G with demands for unpaid PAYE tax and NICs. So, it’s a warning to all businesses who use freelancers to carefully determine the tax status of such workers from the start of their contract.
When doing so, some indicators may point one way and some the other. The important thing is to look at the picture as a whole and consider whether some indicators may carry more weight depending on the facts.
If there is any doubt about a worker’s status, you can use HMRC’s ‘Check Employment Status Tool’ (CEST). HMRC’s CEST tool isn’t perfect, but it may be relied upon by businesses to check a worker’s employment status. If you do use it and rely upon it, make sure you keep a record of the results and any information you use when answering the tool’s questions.
In addition, a good firm of chartered accountants and business advisors can also work with you, to go through a detailed checklist of the key indicators that may be used to determine whether an individual is employed or not. This together with a well-written contract will put you in the best position to support your desired status for your workers. We offer this service to our clients.
Employment status and VAT registration
It’s also worth noting that employment status of workers can have a knock-on impact for VAT registration where businesses engage individuals to provide services directly to customers.
An example would be a hairdressing salon where the stylists take payment directly from the public and pay a ‘chair rental’ or proportion of their takings to the salon.
If the stylists are self-employed, then the business will only need to take into account the amount received from stylists for VAT purposes. If they are employees, then all the stylists’ takings (and not just the amounts paid to the salon) have to be taken into account. This might cause the salon to exceed the VAT registration threshold sooner than they might think.
If you need help with this or any other accountancy, tax and small business issues, get in touch for a no-obligation discussion – see our Contact Us page for how to reach us.
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