When you hire someone, for tax purposes you need to understand whether the law sees them as your employee or sees them as self-employed. If they are your employee then you have important responsibilities, including deducting tax and National Insurance from their wages and paying the money over to HM Revenue & Customs (HMRC). If they are genuinely self-employed, then you don’t need to do this. But treating someone as self-employed when they are, in fact, an employee, can have serious consequences.
What is tax status ?
Tax status means whether the individual you are taking on is employed or self-employed for tax purposes.
‘Status’ is also important for employment law rights, but status for employment law is not the same as for tax. You must look at the individual’s status for tax and employment law separately as they will not necessarily be the same.
The importance of tax status
Tax status is very important because the calculation of income tax and National Insurance contributions for those who are employed and those who are self-employed is different. If tax status is wrong, it is likely that the wrong amount of tax and National Insurance contributions are being paid in the wrong way and at the wrong time.
Tax status also affects how you should pay your worker and whether you have to pay any employer National Insurance contributions as a consequence of having an employee.
If you make the wrong decision about someone’s tax status and you carry this across into other areas, it may mean that the worker is incorrectly classified for other purposes, for example employment law. This can lead to wide consequences for both you and your worker.
The difference between being employed and self-employed
Employed status
A person who is employed operates under an employment contract (that is, they work for someone else – their employer). For more information about contracts of service, see the heading “How to decide someone’s tax status” below.
If the person you have taken on has employed status, you will be their employer and they will be your employee. You will most likely have a formal contract of employment with them and you will have control over what they do and when they do it. Even if there is nothing in writing, a contract of service (or employment) can be inferred from the facts.
If you are an employer, by law you are required to collect tax and National Insurance from your employee’s wages, if they are due, and pay these over to HMRC. You may also have to pay employer’s Class 1 National Insurance.
In addition to tax and National Insurance responsibilities, you will need to understand an employment law issues.
Self-employed status
People who are self-employed are often described as working for themselves. They operate under a contract for services (for example, a business to business contract) and will often provide services to you as well as other people. More information about contracts for services can be found under the heading “How to decide someone’s tax status” below.
Self-employed people are responsible for paying their own tax and National Insurance to HMRC. They will normally give you an invoice for their services, which you then pay.
You will not have the same employment law obligations if your worker is self-employed. However, they may have some rights depending on their employment law status.
Who decides tax status?
It is your responsibility to decide the tax status of the person you hire.
However, you cannot just pick an employment status because it is better for you or because the individual prefers to be employed or self-employed. In addition, it is important to note that the individual will not automatically be self-employed just because, for example:
- they have an existing Unique Taxpayer Reference (UTR) and submit self-assessment tax returns each year; or
- their position lacks permanency; or
- they provide their own small tools.
The correct status depends on the relationship you have with them and the wider circumstances of the person. It is a matter of fact rather than choice.
The starting point will be the nature of the contract or agreement (whether written or oral) that you have with the person you hire. However, this will not necessarily be conclusive because if the facts indicate otherwise, tax law and/or employment law can override what the contract says. So even if you have a contract with the individual that says they are self-employed, if the facts indicate otherwise then they could be regarded as your employee in the event of any challenge.
It is therefore important that you apply the criteria below when deciding tax status. In addition, HMRC can provide help to work out tax status as explained below under the heading Help available with tax status.
How to decide someone’s tax status
The general rule from HMRC practice and court cases is that the individual will be:
- employed if they work for you and do not have the risks of running a business;
- self-employed if they run their own business on their own account and are responsible for the success or failure of that business.
In deciding whether a person is in business on his or her own account or working for someone else, a variety of factors are relevant. Some of the main ones are outlined below, however it is unlikely that one of them on their own will determine the status.
- Can someone tell the worker at what time to work, where to carry out the work and how to perform the work?
- Is the worker obliged to carry out the work themselves?
- Does the worker risk their own money?
- Does the worker work for several different people?
- Does the worker provide their own equipment to do the work?
- Does the worker enjoy benefits usually associated with employment?
- Does the worker have a set number of hours?
- Is the worker responsible for managing anyone engaged by you?
In most cases, it is generally straightforward to apply the criteria and decide tax employment status.
Where it is not so clear-cut, HMRC provides a tool to assist Check Employment Status Tool (CEST).
You must decide the employment status of each of your workers separately. Just because one worker is employed, it does not mean they all will be. You should consider the criteria above for everyone you hire.
Worker who is already self-employed
Your worker may have another job in which they are self-employed, but this doesn’t mean they will be self-employed for you. You need to work out their status solely for the work they do for you. You should also understand that a person can be employed and self-employed at the same time. For example, they may be employed by you during the day, but they may teach music as a self-employed person in the evening.
HMRC Check Employment Status Tool
HMRC can help you determine the tax status of the person you take on.
They offer an online Check Employment Status for Tax tool which you may be able to use to help you. It will ask you a set of questions about your situation and at the end, it will give you an indication of the worker’s status for tax.
HMRC have developed supporting guidance for help using the tool.
HMRC say that you should be able to rely on the tool answer as evidence of your worker’s status for tax and National Insurance contributions, provided:
- you answered the questions accurately based on the actual terms and conditions under which the person provides their services to you; and
- the tool has been completed by you or your authorised representative.
As such, you should print or save a copy of the enquiry and result screen so that if there are any questions from HMRC later, you can show these as evidence that you ran a tax employment status check.
You should, however, be aware that HMRC can re-categorise your worker, if they do not agree that the way something has been answered is accurate.
Remember also that most status determinations will be clearcut without having to use the CEST tool.
If you are in any doubt, another option is to contact HMRC’s employment status helpline to ask for an opinion and keep notes of the conversation. These together with a copy of the CEST status will be useful if HMRC ask any questions later.