The issue of whether a worker is employed or self-employed is often unclear. This uncertainty has resulted in a number of Court cases over the years. From those cases various indicators have been established, pointing towards either a contract of service (employment) or a contract for services (self-employment). Treating a worker’s employment status correctly is important because if a business treats a worker as self-employed when he is really an employee, the tax risk falls on the business, not the worker.
The ESI tool
Fortunately, it is possible to achieve certainty on the employment status of workers in many cases. HMRC’s website features an ‘Employment Status Indicator’ (ESI) tool, which enables the employment status of an individual or group of workers to be checked for Income Tax, National Insurance contributions (NICs) or VAT purposes.
The ESI tool provides an indication of a worker’s employment status based on responses given to a series of questions. The ESI response can be relied upon as evidence of a worker’s status if:
- The answers given accurately reflect the terms and conditions of the worker’s services; and
- The ESI has been completed by the ‘engager’ or their authorised representative.
However, HMRC states that if the worker completes the ESI tool, the result given is only ‘indicative’.
The fact that HMRC will rely upon the ESI tool in the circumstances described above potentially gives taxpayers the best of both worlds. If the tool provides the ‘right’ answer for the worker, HMRC will be bound by the outcome if copies of the ‘Enquiry Details’ and ‘ESI Result’ Screens are printed or saved and retained in case the worker’s employment status is questioned by HMRC in the future.
On the other hand, the worker is not necessarily bound by the ESI tool’s decision if he or she does not like it. The tool provides information on how it arrived at its decision, which can be helpful. For example, in some cases it may be possible for the terms and conditions of the worker’s engagement to be changed to accord with their preferred employment status. However, it is clearly important that those terms and conditions reflect the true facts of the worker’s engagement.
The ESI tool is not without its limitations. It cannot be used to check the employment status of some workers, including company directors and other office holders, agency workers, entertainers and those providing services through an intermediary (i.e. potential IR35 situations). In addition, the ESI tool does not always give a definite answer. Nevertheless, it can be a useful form of protection in employment status disputes with HMRC.
What else can be done to protect businesses engaging workers who are potentially subject to an employment status dispute? Engaging the worker through a Personal Service Company (PSC) may provide protection in appropriate cases, as the tax risk moves from the engager to the PSC under the IR35 rules. There should be a written contract in place between the engaging business and the PSC. It is also important that the paperwork reflects the true facts of the working relationship between the parties, to reduce the risk of challenge from HMRC.
The above article is reproduced from ‘Practice Update’ (March/April 2010), a tax Newsletter produced by Mark McLaughlin Associates Ltd. To download current and past, see the Newsletters section.