Many businesses engage individuals on a self-employed or subcontractor basis. However, describing someone as self-employed does not necessarily determine their status for tax purposes.

HM Revenue & Customs (HMRC) will look beyond the label used by the parties and consider how the arrangement operates in practice. If HMRC concludes that someone should have been taxed as an employee, the business may become liable for unpaid PAYE and National Insurance contributions, together with interest and potential penalties.

How does HMRC determine employment status?

HMRC considers a range of factors, including:

• Control: Who decides what work is carried out and how, when and where it is done?
• Personal service: Must the individual carry out the work personally, or can they genuinely provide a substitute?
• Financial risk: Could the individual make a loss or be required to correct defective work at their own expense?
• Equipment: Does the individual provide the equipment needed to carry out the work?
• Payment: Is the individual paid for completing a particular job, or do they receive a regular wage?
• Opportunity to profit: Can the individual increase their profit by managing the work efficiently?
• Role within the business: Is the individual treated as part of the organisation in a similar way to an employee?
• Employee benefits: Do they receive holiday pay, sick pay, pension contributions or other benefits?
• Other clients: Do they operate an independent business and provide services to others?

These factors are considered together. The written agreement is relevant, but HMRC will also examine how the arrangement operates in practice.

What weight will HMRC give to the contract?

A well-drafted contract is important, but it will not decide employment status on its own. If the contract describes someone as self-employed but does not reflect how they actually work, HMRC may give greater weight to the day-to-day arrangements.

Businesses should therefore check that their contracts remain accurate, particularly where a contractor’s role has changed over time.

What are the potential consequences?

If a contractor has been incorrectly treated as self-employed, the business may be required to pay:

• PAYE that should have been deducted;
• National Insurance contributions;
• interest on the unpaid amounts; and
• penalties, where applicable.

The extent of the liability will depend on the circumstances. The financial impact may be significant, particularly where the arrangement has continued for several years or several contractors have been engaged on the same basis.

What should businesses do?

Businesses using self-employed contractors should review each arrangement regularly and ensure that the contract reflects how the individual works in practice. Clear records should be kept, particularly where the role or working arrangements change over time.

Where there is uncertainty, professional advice should be sought before an HMRC enquiry arises.

How JMW can help

If HMRC has opened an enquiry, or you are concerned about the way your business engages contractors, obtaining specialist advice can help you assess the position and respond appropriately.

JMW’s Business Crime and Regulation team advises businesses and company directors on HMRC enquiries and tax investigations. We can review the relevant contracts and working arrangements, explain the potential liabilities and assist with responding to HMRC.