By Tom Mitchell, Consultant Employment and Commercial Solicitor, Miles Fanning Legal.
The UK is distinct in having three discrete legal categories of employee, worker, and the self-employed. These terms have legal meaning but are often confused and intermixed with other terms such as staff, limb b workers, employer, engager, consultant, or contractor which can refer to one or all of them.
Whilst lawyers love grey areas businesses do not. Recent case law and new guidance has not done as much as it might to offer additional clarification but in simple terms you can think of the categories like this:
Determining employment status is fundamental to knowing what obligations and responsibilities your business has and what you can expect from the individuals concerned. Each category is worthy of its own article but employment status will determine issues such as:
Simply put, the fact an individual might call themselves self-employed and provide services to your business through their own limited company does not prevent HMRC taking the view they should be taxed as if they were an employee.
Whether HMRC could take that view effectively depends on a proper factual analysis of your employment status. HMRC’s criteria are slightly different to the tests an employment tribunal will adopt but are broadly the same.
IR35 is not going anywhere for now. The announcement in the mini budget on 23rd September 2022 simply means that changes to IR35 introduced in 2017 and 2021 will be repealed and we go back to how things were before with contractors responsible for assessing their own employment tax status. The changes will be introduced with effect from 6th April 2023.
Whilst many contractors took the view this was good news it really shouldn’t change the legal analysis at all. Whilst it may change the policy adopted by some clients, many of whom took a defensive attitude to employment status so as not to fall foul of HMRC, a sudden change back to contractor status with no material change in circumstances could be a red flag in itself.
Businesses must remain mindful that as well as HMRC penalties for failing to make appropriate deductions to pay, companies are now obliged by the Criminal Finance Act 2017 to prevent the facilitation of tax evasion in their supply chains. Therefore, individual circumstances should be closely considered for existing and future engagements of the self-employed.
Prior to the 2021 IR35 changes the Chancellor promised a “soft landing” with regards to compliance, but that outlook later changed. Towards the end of 2021 HMRC commenced wide-scale compliance activity in and amongst government departments, Oil & Gas, and Financial Services sectors. HMRC is keeping its future compliance activity plans close to its chest, but it is suspected that there will not be a let up in enforcement activity and checks on contractor status will be undertaken more widely across other industries.
As ever businesses should carefully consider employment status and in particular:
An effective compliance process will not just look at the documents but also the practical reality of how the relationship is working. The contract is one aspect but it’s of no use if the substance of the relationship is quite different.
I have seen a significant increase of those formerly happy contractors, including those based overseas, willing to make claims that they were in fact employees or workers all along. In many cases a lot of that risk can be avoided with early advice and effective processes being put in place.
This has been an evolving area of law in recent years. There have been several government led investigations into employment status and in particular the protection of often vulnerable ‘gig economy’ workers. There have been some high-profile cases such as those involving Uber and most recently radio presenters in HMRC v Atholl House Productions Ltd  EWCA Civ 501.
The UK may also find itself under pressure to adopt elements of the EU directive on transparent and predictable working conditions (Directive (EU) 2019/1152 of 20 June 2019) and forthcoming legislation on improving working conditions for those on digital platforms. Whilst the UK is no longer obliged to adopt them they deal with same set of issues the UK is wrestling with.
The Government’s good work plan of 17 December 2018 has so far resulted in:
The Government has indicated additional reform including in relation to breaks in continuous employment but timescales for such are unknown and with a change of Prime Minister priorities will change again. Regardless of whether it is government or court and tribunal led further change in this area of law does seem inevitable given the pace of change in technology and working practices.
* The statutory guidance is available here https://www.gov.uk/government/publications/employment-status-and-employment-rights