HMRC’s Approach to Employment Status

HM Revenue and Customs have come up with something to help employers and workers to establish if someone is genuinely self-employed. It is an online tool to determine for tax purposes, whether an individual is an employee or self-employed. That is different, of course, to whether they have ‘worker’ status – something which the taxman does not recognise but employment tribunals do! The Tool is available at https://www.tax.service.gov.uk/check-employment-status-for-tax/setup.

Only a week later, HMRC had to vigorously deny claims that the tool was unreliable, inaccurate and leaves contractors unsure of their status.

Contractors, or those who engage them, can use the tool to answer a pre-programmed series of questions, which change depending on the user’s responses. HMRC was heavily criticised last year that both their Business Entity Tests and their Employment Status Indicator online tools were deemed to be not fit for purpose. HMRC had previously published a checklist as guidance for whether a person was self-employed for tax purposes. This was criticised, as it gave an indication of employment status, but no ‘definitive’ answer. Both of these HMRC tools were heavily biased towards indicating an employed status for the individual whose employment status was being determined.

One contractor portal, “ContractorCalculator”, claimed it had trialled the tool by inputting 21 historical court cases around employment status. More than a quarter of cases received an “unknown” result, while one-tenth “passed” the online test (meaning they would be categorised as self employed), despite a judge having decided otherwise. It also found that contractors who are “significantly controlled” and moved about frequently, tended to pass the online test, despite case law indicating this would not be the case.

It appears that the test is largely reliant on the issue of substitution. If the contractor does have the right to send a replacement, there is little prospect of the tool deeming the person to be a genuinely independent contractor, even if everything else points to self employment. There are big concerns that an “unknown” status could create uncertainty for all. Many of the questions failed to offer much direction on “mutuality of obligation”, which is one of the key factors in determining employment status.

The difficulty with the new online tool is that whilst it does give a definitive answer (albeit in some cases the answer is, definitively, ‘unknown’), it is wholly dependent on the prescribed boxes being ticked by the person using the tool. Given that a worker’s view of the working arrangement could be substantially different from that of the ‘employer’, this could feasibly lead to the same arrangement being classed by the tool as both self-employed and employed, depending on who is filling in the questions and how.

The difficulty with this test, and other online status tools, is that the law on employment status is nuanced and dependent on the facts in each case: it cannot simply be reduced to a box-ticking exercise. It is possible for HMRC and an Employment Tribunal to come to different conclusions in the same case. This is due to some differences in the tests applied, and the fact that under employment law, there are employees, workers and the self-employed, whereas the HMRC only recognises employees and the self-employed. Employment Tribunals will take into account HMRC’s view when deciding whether an individual is an employee, but there are reported cases in which the tribunal has found an individual to be an employee or worker, whereupon HMRC had concluded the same individual was self-employed.

There are many factors which may also be highly persuasive in deciding whether an individual is in business in their own right. The importance of each factor can only really be weighed up by taking a holistic view to business. Clearly, if the self employed person is a sole trader, and they have other clients they are supporting at the same time as you, then you are probably in a safer position to justify they are genuinely self employed than if they are exclusively working for your organisation.

In our experience, many organisations try to justify that people are self employed when it is clearly evident that they are not, and the reality is that one or both parties are really just trying to avoid making statutory payments. Therefore, if your self employed contractor looks likes they are integral to the organisation, they are playing an active role in core aspects of what you do, and they personally have been doing it for a long time, then as one employment judge made the memorable observation: “if it looks like a duck and quacks like a duck, then it is a duck.”

Clients are welcome to raise concerns with their Consultant who will be pleased to advise you on any element of the issues arising from this newsletter.