This article was originally published in Employer News and can be accessed here. 

Off-payroll working rules – Employment legislation vs tax legislation

It is widely known that many ‘self-employed’ individuals, working exclusively for an employer enjoy lower taxation by paying themselves through their own personal services company (“PSC”) via dividends, rather than operating PAYE, as required under IR35 legislation.

This has not gone unnoticed by HMRC which is about to close the loophole by introducing the off-payroll working rules to the private sector for medium and large companies only. The rules require the end-user of contracted services to take responsibility for reassessing contractors. The end-user client company will need to notify their contracting party (the intermediary) and the worker of that status determination. The final party in the chain before the PSC must operate payroll, make deductions for income tax and employee’s national insurance contributions and pay employer’s national insurance contributions on the fees paid for the services. Alternatively, the end-user can place deemed ‘workers’ on their own payroll. Some end-user companies are opting for the latter solution because of the potential risk of being liable for back payments of income tax and National Insurance contributions. This risk arises if (i) HMRC decides that the self-employment is a sham, or (ii) the PSC does not account for tax and NICs, then in either case HMRC can go after the intermediary or client (or any other party in the supply chain) to recover the unpaid amounts.

In the case of freelance individuals working for Thomson Reuters (see FT article of 18th February), in order to keep the same level of earnings as self-employed individuals, they will need to show that they are in control of their day-to-day working lives. Factors pointing towards self-employment under tax legislation are similar to (though not the same as) the rules under employment legislation such as: the right of substitution; the ability to decide one’s own hours of work; how much leave one can take and when. If Thomson Reuters has overall control over the contractor’s working life and therefore deemed ‘worker’ status under tax legislation applies, then the off-payroll working rules will apply.

Confusingly, if an individual is reassessed as being a worker under tax legislation, e.g. via HMRC’s online CEST (“Check Employment Status for Tax”) tool, this does not automatically mean that he/she is a worker for the purposes of employment legislation. So worker rights – as fought for successfully by Uber drivers and workers employed by Pimlico Plumbers – will not necessarily apply to ‘workers’ who have been assessed under CEST. There is currently no case law on the ambiguities that arise between employment status for tax purposes and employment status for the purposes of workers’ rights. It is surely time for tax and employment legislation to be aligned and clarified in this respect.