Employing people is costly. Employer’s national insurance, pension contributions, sick pay, holiday pay etc… all add up! As a result, many business owners look to alternative ways to engage the individual in either a personal capacity or through a limited company.
The problem is you cannot just do what you want! If when all is taken into account the person is in all other respects an employee then legislation is there to tax their earnings as employed income.
If you engage someone on an hourly basis to work in your premises or on site, and they are under your instruction, provide no equipment or have no risk of financial loss (other than their time) then they are probably employed. It doesn’t matter how few hours they work or how irregularly they work for you if they are engaged in a similar manner to that of an employee then they are probably employed in the eyes of the law.
There are two issues. The rights of the “employee” such as pension contributions and holidays etc… and the taxes due. HMRC are interested in the taxes due. How the individual is engaged and the type of business owner engaging the individual will determine who is liable for the tax and national insurance.
For a long time most business owners, with the exception of those in the construction industry, have steered away from engaging individuals on a self employed basis unless they are genuinely self employed.
For example let’s say you, as the business owner, ask a friend to do some secretarial work for you at your offices for 10 to 15 hours every week. They have a desk in your office and you agree to pay them on a self employed basis. They incur no costs personally. You pay them purely for their time and they invoice you every week for whatever time they have worked. From a HMRC point of view they are clearly an employee, and as you have treated them as self employed they will deem you, the business owner, as the employer and you will be liable for any unpaid PAYE and national insurance usually for up to 6 years.
So how do you get around this? For many years business owners have insisted that the individuals set up a limited company and invoice their time via their own personal services company. As you cannot put a company on the payroll this potentially gets you around the problem. Many consultants working in IT, banking or in construction have been engaged on this basis for many years.
However HMRC have long been wise to this and introduced in the year 2000 the off payroll rules, better known as IR35, to counter this. Under these rules if the individual engaged sets up their own company to invoice you and they would otherwise be treated as employed then their personal company would be liable for PAYE and NI (employer’s and employee’s). The liability ultimately falls on the individual via their own limited company. This whole area has, however, been extremely difficult to police as the individual needs to determine their employment status and why would they want to treat their earnings as employed if they can save tax by taking their earnings out as a small salary and dividends! The result was that thousands of individuals who set up their own personal services companies have avoided the off payroll rules.
Over recent years HMRC have tightened the net further. Firstly they have ensured the risk is moved to the engager- the business owner/client or their agent. This legislation was brought in initially on 6 April 2017 but only for people working in the public sector, i.e. where the business owner/client is a government owned or funded organisation. From 6th April 2021 medium size or large businesses in the private sector will have to accept liability. Small companies are still exempt but there will be certain actions they will have to take.
We have now updated our previous article on the off payroll rule changes which come into play on 6th April 2021. Our article details the actions that all companies which engage contractors, whether large or small, need to take now and in the run up to the 6th April 2021 and what happens afterwards.
These are important changes, so if you engage any individuals through their own limited companies you need to review this urgently and take action.
If you need advice on how best to engage individuals or the actions you need to take now then please contact Mark Friend or Andrew Grant or one of the team urgently.
The content in this blog is correct as at 06/10/2020. See terms and conditions.