Contractors, consultants, freelancers, and IR35; A quick guide and update on employment status and IR35

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By Tom Mitchell, Consultant Employment and Commercial Solicitor, Miles Fanning Legal.

Who is an employee and who is not

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:

  • Employee; the majority of permanent, full time employees with a single employer, paid through PAYE, and subject to the most obligations. They are required to do the work personally;
  • Worker; commonly these individuals will still be required to personally do the work themselves but will have a more causal working relationship and flexibility over how, when, and where they work, often with more than one ‘employer’. Sometimes referred to as a limb b worker;
  • Self-employed; will generally be entitled to send somebody else to do the work on their behalf and subject to the most freedom on how and even if the work is done, essentially in business for themselves and subject to many of the same commercial risks as any other supplier. They may sometimes operate through their own limited company and be referred to as self-employed, contractors, or consultants.

Why is it important to determine

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:

  • How to account for tax and in particular whether to pay through PAYE or invoicing as is the case for the self-employed;
  • Any obligations which are implied into the contract between the parties. Employees have the greatest number of implied terms including the term of mutual trust and confidence which means an employer must not conduct themselves in a manner calculated or likely to destroy or seriously damage the relationship;
  • What rights the individual has. For instance, employees and workers have some significant legal protection including in relation to the minimum wage, annual leave, working time, written particulars of employment, and pay statements;
  • Whether you are liable for acts done by the individual concerned. Employers are liable for acts done by an employee but not always the self-employed;
  • How to deal with any disciplinary action since an employee has protection from unfair dismissal and dismissing them unfairly can lead to substantial claims for lost earnings and benefits. 

What is IR35 and what has it got to do with employment status

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.

What has changed, I heard IR35 is being scrapped

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.

What should I be doing now

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:

  • The hiring process for contractors;
  • The process for deciding the employment status of those workers; and
  • The process for deciding if any services that are outsourced are fully contracted out and have remained so during the lifetime of the contract.

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.

Future outlook

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 [2022] 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: 

  • Statutory guidance on employment status*
  • An increased pay reference period for calculating holiday pay to 52 weeks; 
  • A right for employees and workers to be provided with written particulars from day 1; and
  • A right to a Key Facts Page for agency workers.

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