This TAXguide contains answers to the questions raised by delegates at the Tax Faculty’s webinar Off-payroll working: employment status, presented on 15 Febaruary 2021 and available to watch again.

Q1 Please give definition in 3 lines, for an employee, a worker and self employed.
Q2 Please give the definitions on one page so one can see the key differences.
Q3 Had difficulty understanding differences between employee, and self employed and now you have added a 3rd category.

For tax there are two categories: employee and self employed. Under employment rights law there are three categories: employee, worker and contractor. To determine into which category an individual falls whether for tax or employment rights, it is necessary to look at all the facts in the round.

An employee is someone who works under a contract of service, whether expressly or implied. There are four main key indicators of employment status: control, personal service, mutuality of obligation, and other provisions consistent with a contract of service.

• Control includes the power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time when and the place where it shall be done. It can be shown through the employer dictating the terms of the employment relationship, having the right to direct the employee on what to do, and being able to bring the employee up on disciplinary procedures. The question of control is not whether the worker has control over their own work each day but rather whether the employer has a contractual right of control over the worker, for example, is there a sufficient framework of control
• Employees are generally required to provide personal service, whereas self-employed and independent contractors can provide a substitute worker or subcontract the work.
• Mutuality of obligation (MOO) in the specific context of employment refers to the employer’s obligation to provide work and the individual’s obligation to accept the work provided. There is a more general MOO which determines whether there is a contract in existence at all, but this applies to any contract, such as to build a house, deliver a package, etc.
• Other provisions consistent with a contract of service include being subject to the organisation’s rules and procedures, being integrated into the organisation’s business (for example, attending internal meetings or events, being provided with a uniform, equipment or business cards), being managed by an employee of the organisation, receiving salary and benefits or maternity, paternity or adoption pay, having a longer and more permanent engagement and being subject to restrictions on working for others).

A worker is someone who has a contract or other agreement to do work or services personally for a reward. Workers are not fully independent but are nevertheless entitled to some – not all – employee rights. Key rights for workers include national minimum wage and statutory paid holiday.

Someone classified as being self employed runs their own business, is independent and autonomous, bears all financial risk, has their own terms of engagement (for example, will be paid per assignment), is free to decide whether and how to do the jobs, pays their own tax and manages their own social security, and does not have employment rights with or liability protection from those for whom work is undertaken.

See also government guidance Employment status.

Q4 Your slide says "other provisions consistent with a contract of service" but I thought that a contract of service was a contract of employment - isn't the phrase "a contract for the supply of services" relevant for a self-employed person?

Yes, that is the normal terminology.

Q5 Surely contractual control can be said to exist in all circumstances through the very fact that the contract is in place. The “employer” has exercised control in offering the contract to the individual. When, how might this not apply?

Please see the answer to Q1-3 which summarises “control” in the context of employment status, and, in the section on MOO, highlights that different sides of the same coin may need to be considered when determining employment status and whether there is a contact.

Q6 Re internal meetings, presumably this does not include those necessary for the discharge of the objectives of the contract?

That is correct. The internal meetings that independent contractors should avoid are internal meetings and events aimed at employees.

Q7 How important is the exposure of the individual to financial claims? And does it have to be the whole claim or part of the claim?

Exposure to financial liability is just one aspect to consider when determining whether or not a contactor falls on the employment or self employment side of the line. However, as it would be highly unusual for an actual employee to be exposed to the possibility of financial claims, when assessing status, being exposed to financial claims would be a strong pointer towards not being an employee, especially if the other relevant factors point the same way.

Q8 Re personal liability, how does that work when one is working through a limited company?

The contractor’s strategy of working through a company will mean that their personal service company shoulders any liability (e.g. for breach of contract) risks in the first instance. However, as the contractor is providing personal services, clients may want to ensure that the contract includes the ability to pursue the contractor personally. For example, clients quite typically request that individuals enter into direct obligations as regards confidentiality, intellectual property and data privacy.

Q9 An obvious effect of the pandemic has been to see many more people working from home - probably likely to be the new normal. Will this tilt many marginal cases towards self-employment status?

Undertaking work away from the premises of clients is likely to reduce the opportunity for contractors to become integrated into the business of their client and all other factors being equal may help tilt the balance away from being determined to be a deemed employee. However, the advance of technology such as Teams, Zoom, etc is such that one could see virtual integration of the client with the contractor being indistinguishable from the client’s virtual integration with its employees. ICAEW Tax Faculty: Off-payroll working: employment status: webinar questions and answers 4

Q10 What is the status of zero hour contracts? Are they employees, workers or self employed?

The term “zero hours contact” is normally applied where employees and workers are to be paid for hours worked – there being no obligations on the parties outside of the actual time worked. This term is not commonly applied to the self employed.

Q11 Are zero hour contract people entitled to holidays? Or do they just work as and when required, i.e. once or twice a week as and when required and not entitled to any holidays?

Workers (which includes employees) on zero-hours contracts are legally entitled to 5.6 weeks’ paid holiday per year. See government guidance Holiday entitlement for more detail, including on how to calculate holiday entitlement and pay.

Q12 Ready Mix Concrete. What was the decision?

In Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497 the court held that, on the facts, in the light of the freedoms that the owner-driver had in the performance of his contractual obligations as he was free to decide the vehicle, his own labour, fuel, and other requirements in the performance of the task, he was an independent contractor and not an employee of the company. The case is still commonly regarded as the starting point for employment status.

Q13 Stephenson v Delphi is a HC case. Elias J said mutuality DETERMINES whether there is a contract of employment [at all]. This should overrule tribunal decisions. Why doesn't HMRC accept this? Why don't we fight harder?

A W Stephenson v Delphi Diesel Systems Ltd [2002] UKEAT 1314-01-1111 was an Employment Appeal Tribunal decision (so an employment rights, not a tax, case). As noted in the slides, Elias J said: “The significance of mutuality is that it determines whether there is a contract in existence at all.”. As we note in the answer to the next question, this seems to be HMRC’s view of MOO but we believe that this only half the story because to determine whether there is a contract of employment in existence it is necessary to ascertain inter alia whether there is specific MOO (as described in the answer to Q1-3). In practice, HMRC have adopted their approach to MOO and practitioners and clients are often faced with a pragmatic decision to make as regards the commerciality of pursuing an assessment through litigation or reaching an agreement with HMRC to balance cost and risk.

Q14 What’s the key difference between the Lorraine Kelly and Paul Hawksbee cases?

In very brief terms, in Albatel Ltd v CRC [2019] UKFTT 195 (TC), Lorraine Kelly’s “brand” won the day and exemplifies that employment status needs to be considered in the round. The FTT found that although there was MOO, it amounted only to the irreducible minimum and was not determinative of the issue, control of Ms Kelly’s day-to-day work lay with her rather than ITV, and, regarding other factors, Ms Kelly was in business on her own account, for example she was allowed to and did carry out substantive work for others. On the other hand, in CRC v Kickabout Productions Ltd [2020] UKUT 216 (TCC), the UTT overturned the FTT’s findings. It decided that there was MOO, because not only was Kickabout required to undertake work but Talksport would be under an obligation to provide Mr Hawksbee with work, there was a sufficient framework of control for Mr Hawksbee to be regarded as an employee of Talksport, and that other factors, including the length of time Mr Hawksbee had ICAEW Tax Faculty: Off-payroll working: employment status: webinar questions and answers 5 been presenting the show (18 years), and that he had not worked for anyone else during that period, was required to give 4 months’ notice and was not allowed to send a substitute (so personal service), all indicated that the contract was one of employment.

Q15 CEST assumes a prerequisite that mutuality of obligation exists before considering whether contract of service but the UTT decision in Kickabout seems to have decided employment status on this matter though there were other secondary factors which contrasts with referees?

HMRC’s interpretation of MOO seems to differ from that used by the tribunals and courts. CEST does not test for what many refer to as specific MOO (as described in the answer to Q1-3) and our understanding is that CEST assumes that MOO, or at least what many refer to as general MOO, exists in all cases where work is undertaken because there is a contract, even if unwritten.

Q16 Locum GP doctors working in GP practices. Are they employees or self employed?

As they are highly qualified and practice does not control them as to how they perform their work.

Q17 It has been suggested that dentists might be deemed to be employees. If you work in a practice where virtually all of your tools (chairs, drills, etc) are provided for you.

Q18 It has been suggested that HMRC treat dentists working in a practice as employees and not self-employed. This is because equipment and materials are provided for the worker, the patients belong to the practice (they are not yours) but you do have control over the treatment carried out on the patient and if something goes wrong it is the dentist and not the practice which will be sued. Is it still reasonable to treat dentists as selfemployed?

Whether the doctors and dentists in these particular cases are employees or self employed will need to be determined in the round in the light of all of the facts and circumstances. The case law recognises that it is difficult to control to a great extent technical experts in their field (such as doctors and dentists) – their expertise is why they are hired in the first place. Therefore, in such a case, control is not likely to be the decisive factor and a rudimentary framework of contractual control may suffice for employment status purposes.

Q19 Mention was made of chefs, IT consultants and a surgeon. Was there a case involving an airline pilot that rather diminished the power of argument based on individual, specialist expertise?

Examples of the limited relevance of control in technical expert or professional settings include IT consultants – Dragonfly Consultancy Ltd v HMRC [2008] EWHC 2113 (Ch), surgeons – Mitchell and another v HMRC [2011] UKFTT 172 (TC) and engineers – Morren v Swinton and Pendlebury Borough Council [1965] 2 All ER 349.

Q20 My client is an agency that hires workers from subcontract companies and provides them to the end client. Are employment agencies exempt from IR 35?

Staff that are supplied by agencies and who are not working via intermediaries such as personal service companies are employees of the agency. The IR35 and OPW rules apply only where contractors are providing personal services via intermediaries such as personal service companies. Where the agency is employing the workers and deducting PAYE, IR35 and OPW rules are not engaged. See HMRC Manual ESM10003.

Q21 Would the specific Film & TV industry guidance (covering specific roles deemed as self employed) take precedence over the other status factors, i.e. can you rely on this alone to assess self employment status without having to do the SDS etc?

Employment status needs to be determined with reasonable care in the normal way but in the context of whether the facts and circumstances of the engagement fit into the terms of the guidance. The cases discussed in the webinar (part of something of a glut in recent years in the sector) show that it is dangerous simply to apply guidance in general terms – there is no “one size fits all” answer

Q22 Can you explain in a bit more detail the impact of GDPR on employment status please?

GDPR is, of course, a self-standing set of obligations. Treating a contractor like an employee would point towards employment status but it is unlikely to be a determinative factor.

Q23 What are the practicalities for a tax adviser asked by someone wanting to be regarded as self-employed, bearing in mind the HMRC risk pressures on the other contracting party to treat such individuals as employees for tax?

We appreciate that there can be commercial pressure to provide the “right” (in the sense of most convenient) advice. However, naturally the adviser’s professional obligations should take precedence (see Professional Conduct in Relation to Taxation).

Q24 I don’t understand the difference between a direct employee and move onto PAYE.

“Moving onto PAYE” is where the client seeks to minimise the tax and NIC risk by putting the contractor onto payroll and applying PAYE, but the contractor is expressed to be not a full employee but a worker.

What are the options? Umbrella companies (slide 29)

Q25 Can you pls advise what advantages would arise for contractors to go with umbrella companies instead of deemed workers within IR35?

Q26 Is using an umbrella company better than keeping a personal service company?

The advantage for a contractor of working through an umbrella company is that the contractor is an employee of the umbrella company so has employment rights and does not have to bother to run a personal service company. They may also be retained within a client (e.g. for a certain project) via an umbrella where that client has taken a policy decision not to engage through personal service companies.

What are the options? Will AWR apply? / Refresher (slides 33-35)

Q27 What's AWR?

Agency Workers Regulations 2010. They provide certain rights to workers supplied by a third party to work under the hirer/end user’s direction and control. From day one, there is, for example, access to collective facilities (canteens, gyms, etc) and, after 12 weeks’ relevant service, a right as regards pay and other core terms to treatment equal to a permanent ICAEW Tax Faculty: Off-payroll working: employment status: webinar questions and answers 7 employee hired to the same role. This is a basic summary of very complex legislation, so please treat with caution. There is remarkably little case law since the introduction of this legislation.

Q28 Are tax and NIC deductions made from payments to workers?

Q29 For income tax purposes is a worker’s remuneration taxed as employment income?

Not all “workers” are necessarily “employees” for tax purposes so payments made to “workers” will be subject to PAYE only if their employment status for tax is that of an employee.

Q30 Client using an umbrella company to “avoid” IR35 - they are deducting employers NIC & pension from gross pay which is unfortunately to be expected, in addition to tax and employees NIC but they are also deducting employers NIC & pension from “gross” pay when working out tax - is this correct?

It would be necessary to see the details to comment with authority as we may not be using common terminology here, but, subject to that, employer NIC and the employer element of pension contributions should not be deducted from net pay, unless it is a term of the contract, and, even then, the appropriate employer NIC should be paid to HMRC. If a complaint to the umbrella company/agency does not resolve, then the client and HMRC would doubtless be interested.

PAYE: allowable expenses

Q31 What are the expense deduction rules for workers – are they that of the self employed or are they that of an employee?

The expenses rules for “workers” and deemed employees under the OPW rules are exactly the same as for actual employees.

Q32 Can a contractor claim mileage costs on his personal tax return?

The expenses rules for contractors are exactly the same as for normal employees, so if the facts and circumstances surrounding the mileage costs would support a claim submitted by an actual employee, then a contractor can claim mileage costs on their personal tax return.

PAYE: employment allowance

Q33 A client company has two director/employees. One is furloughed, the other is working as an off payroll worker. Both are being paid by the company in excess of the NI LEL. Does the fact that one is paid off payroll disqualify the company from claiming the employment allowance?

The fact that a company has one or more employees who are OPW deemed employees does not automatically disqualify it from claiming employment allowance (EA) in respect of other employees who are on furlough. However, the interaction between the NIC element of the coronavirus job retention scheme and EA is not straightforward; please see our guidance Employers must act now on EA and NIC. In addition, any fees to an office holder such as a director in respect of that office must be subjected to PAYE. The question states that both directors are being paid more than the NIC lower earnings limit, which is less than the NIC secondary threshold (ST). Following the changes to EA from April 2016, an employer cannot qualify for EA where there is only one employee with earnings above the ST where that employee is also the director. This is not impacted by whether a director(s) or other employees are currently furloughed. Guidance on the qualifying criteria for directors claiming the EA can be found on gov.uk at Change to Employment Allowance from 6 April 2016.

PAYE: when something goes wrong

Q34 Where a decision is made and say someone is deemed to be an employee and owes tax and NIC, does it follow that there is an obligation on the now employer to pay over back sums of employers NIC?

Yes, the rules are the same as for actual employees who should have been paid under deduction of PAYE.

Q35 What are the issues between large employers and smaller ones and their respective obligations on IR35 - Company v Contractor obligation to be open to change? When might things change?

Under the original IR35 rules which came into effect on 6 April 2000, responsibility for determining the deemed employment status of a contactor providing services to an end client via an intermediary such as a personal service company lies with the contractor’s intermediary – normally their personal service company. The OPW rules that came into effect on 6 April 2017 moved responsibility for determining deemed employment status to the end client where the end client is in the public sector. With effect from 6 April 2021, where the end client is a non-small business in the private sector, the OPW regime has been amended and extended to impose that responsibility on those clients.

Q36 Do the rules apply for non-UK based contractors?

If the contractor is not UK resident and no work is carried out in the UK, HMRC’s guidance at ESM10025 (updated 14 April 2021) confirms that:

“A worker who is not UK-resident and is performing work outside the UK is unlikely to fall within the charge to UK tax or NICs. If the worker is not chargeable to UK tax or NICs, then the off-payroll working rules will not apply.”

Q37 Does the ICAEW guidance on letters of engagement, terms and conditions etc now take into account and anticipate all the issues that we will be hearing about today?

Our engagement letters guidance (available to ICAEW members, most recent update April 2021) includes text covering OPW and IR35 services. In addition, in the light of the statement in Professional Conduct in Relation to Taxation that members who do not feel competent to advise on a topic should seek advice from or refer the client to a third party, it also contains text to enable practitioners to exclude certain OPW and IR35 services if desired.

Mark Hammerton is Partner in the Human Resources Practice Group of Eversheds Sutherland with over 20 years' experience in employment law. He leads the Group’s IR35 team and works with colleagues on recruitment services, consultancy and outsourcing agreements where labour is a key aspect. He is also expert in TUPE, restructuring, complex disciplinary/ grievance matters, executive severance and international HR projects – including changes to terms, restructuring, outsourcing and M&A.