We’re seeing a mixed bag when it comes to the recruitment needs of small businesses. They either can’t find the right staff and / or they can’t find enough staff.  

Consequently, many are considering hiring contractors on fixed term contracts to ‘plug the gaps’.

And then the fixed term contractors end up staying for waaaay longer than their ‘fixed term contract’.

So what?

Well, if the contractor turns out to be an employee (for the purposes of tax), employers could face massive, sometimes debilitating fines made by the HMRC.

For tax/NICs purposes, an individual is either an employee or self-employed. In addition, there are circumstances in which a contractor may be deemed to be an employee for tax/NICs purposes even if the contractual relationship between the parties is one of self-employment. 

Be Warned: If a contractor works directly with a client as a self-employed individual, there is a risk that HMRC could subsequently re-categorise the contractor as an employee. The client would be liable for PAYE and employee and employer NICs arrears, generally for the previous six tax years (although the client would be able to offset any income tax and NICs paid by the contractor on their fees) together with interest and penalties.  

Courts and tribunals look at lots of different factors to decide whether someone is an independent contractor or an employee. Generally, there are three essential requirements for a contract of employment to exist:

1. control
2. mutuality of obligation and
3. personal service.

If any of these are missing, the contract will not be a contract of employment.

Control

Is the worker told what to do and when and how to do it?

Can the worker be disciplined if they don’t do the work properly or turn up late?

Mutuality of obligation: does each side owe obligations to the other?

Is the worker obliged to do any work they are given, or can they just decide not to do it?

Is there an obligation to provide work for the worker to do?

If the worker is obliged to do the work, they are likely to be an employee.

Personal service: does the worker have to do the job, or could they ask someone else to do it?

If it doesn’t really matter who the worker asks to do the job as long as the work is carried out, this normally indicates the worker is not an employee.

Other factors that may suggest the worker is an employee:

• if they work set hours;
• if they’re paid by the hour/week/month;
• if they work at the employer’s premises or at places determined by the employer;
• if they are not allowed to work for others (especially competitors); and
• if they could be dismissed.

Other factors that may suggest the worker is a contractor:

• if they risk their own money in the business
• if they have the final say in how their business is run;
• if they provides their own equipment;
• if they hire others on their own terms to do the work, who are paid by the worker; and
• if they are free to work for others.

HMRC introduced the CEST service in 2017 to help employers (or hirers) and workers to determine how the work being done should be dealt with for tax purposes.

Further information can be found here:

https://www.gov.uk/guidance/check-employment-status-for-tax

We’d advise only looking at this if you’re having a particularly slow day.

As always, any questions just reach out to us at thehelens@complexhr.co.uk