Self-employed contractors: Understanding the law

This guide, produced in collaboration with law firm Lewis Silkin, focuses on self-employed contractors. Although the term ‘self-employed’ is not defined in legislation, it is generally accepted to apply to those individuals who run and manage their own business and who would, for example, have control over how, when and who carries out the work. They would also negotiate a price for the work to be carried out.

Businesses and individuals should be aware that a self-employed individual may be categorised as self-employed for tax purposes but be considered an ‘employee’ (or more likely a ‘worker’) under employment law and therefore entitled to certain statutory rights and protections. Further, where an individual’s services are provided to a business client via a ‘personal services company’, certain tax-related obligations will be triggered under the IR35 regime.

This guide is designed to help employers ensure that they understand the relationship that they have with their self-employed contractors and highlights any legal issues that they may come across. It also includes information and key points for self-employed individuals to help them understand their employment status and rights.

Self-employment and an overview of the law
Employment status – where do the self-employed fit in?
Summary of key rights and protections
Employing a person vs engaging a self-employed contractor
Tax and contractors
How to decide what contract to use
Acknowledgements

Self-employment and an overview of the law

What does ‘self-employment’ mean?

A person’s employment status is the gateway through which an individual’s legal rights and tax obligations are determined.

Although ‘self-employment’ is not defined in legislation, if a person is a business owner or contractor that provides services to other businesses, either directly or through a personal services company (PSC), they will generally be considered to be self-employed. They will usually bid or provide quotes to secure work and they will also have control over how and when the work is performed while supplying the primary tools needed to carry out the work.

For more information on PSCs, please refer to the section on Tax and the self-employed below.

Case study Example 1

Anna is a chartered accountant and the sole owner of Accountancy 123 Limited. Through Accountancy 123 Limited she provides accountancy services to other small businesses in her local area. In order to get work she has to market her services to the world at large and provide fee estimates to potential new clients. She has complete control over when, where and how the work is completed, and if she does not work, she does not get paid. Anna would therefore be considered to be self-employed.

Self-employed people are responsible for their own income tax, NICs and VAT arrangements. As a result, self-employed individuals will need to account for income tax and pay self-employed persons’ National Insurance contributions (NICs). Individuals can also be both employed and self-employed simultaneously, for example, if they work for an employer during normal working hours and then run a business in their spare time.

A self-employed person will have very few employment rights. Most of the rights that a self-employed individual is entitled to will be contained in the terms of the contract with the party who has engaged their services. For example, unless the contract specifically provides for it, they will not receive holiday or sick pay when they are unavailable for work.

The section in the guide on employment status, below, explains in more detail the different characteristics of each status. However, there are a few points to note. Ultimately, although a self-employed person will not be entitled to the same protections under employment law as employees or workers, they will:

have protection for their health and safety while working on a client’s premises
be protected against discrimination in certain circumstances
have their rights and responsibilities enshrined in their contract for services
in limited cases, be classed as self-employed under the UK tax framework but be considered an employee (or more likely a worker) for employment law purposes. This difference is because the tax regime does not recognise ‘worker’ status.

The self-employed are obliged to fulfil their contractual obligations and work with due skill and diligence.

Circumstances where the self-employed will be protected from discrimination

Discrimination law protects those who are employees, workers and also anyone who is ‘employed under a contract personally to do work’. Therefore, it covers some individuals who are considered self-employed under the Employment Rights Act 1996, because there is no exception for those providing services to a client or customer in the course of running a business (see Employment status – where do the self-employed fit in below).

Case study Example 2

Following on from example 1, Anna provides accountancy services to a local business who is one of her clients. Under her contract she is obliged to do the work herself and cannot sub-contract or allow anyone else to do the work. She is ‘employed under a contract personally to do work’ for her clients, so would benefit from protection from discrimination even though she is considered to be self-employed.

Employment status - where do the self-employed fit in?

Types of employment

This section sets out the legal tests for determining employment status. This includes the types of obligations that employees, workers and self-employed individuals are owed and owe.

There are three main types of employment for employment law purposes:

• Employee

• Worker

• Self-employed

The majority of all working individuals will fall into one of these three categories. Employment status will be dependent on what is set out in the contract and how the working arrangements operate in practice. and whether any statutory definition in relation to status is satisfied (ie in relation to worker status).

Although there is no definition of what constitutes self-employment, legislation does contain provisions in relation to employee and worker status (see below).

Statutory provisions under the Employment Rights Act 1996

Employee

A person is an employee if:

they are someone who has: ‘entered into or works under a contract of employment’.
This means a contract of service or apprenticeship.

Important points to note:

The contract does not have to be written down, it could be agreed orally.
The terms of the contract could be implied rather than expressly agreed. Implied terms are those which the parties can be taken to have agreed, perhaps because they are obviously necessary or because they are customary in that business.

Worker

All employees are workers, but not all workers are employees.
A worker must have entered into or work under a contract to perform work or services personally for another party.
The other party to the contract must not be a client or customer of any profession or business carried on by the individual. If the other party was a client or customer, it is likely that the individual would be found to be self-employed.
The terms of the contract may be express or implied and (if it is express) may be oral or in writing.

Employment status tests from case law

However, employment status tests have been developed in case law and so establishing the employment status of an individual will be dependent on the facts of each case. This is illustrated by the emphasis given to the elements of personal performance and right of substitution in one of the leading employment status cases, Autoclenz Ltd v Belcher and others [2011] IRLR 820 SC. For more detail on the specifics of this and other cases, refer to the case summary in the Appendix, which can be downloaded separately.

The legal tests for each type of employment status are summarised below. The terms highlighted in bold are explained in more detail below.

Employee

An individual will likely be an employee if:

• there is an obligation to provide personal service

• there is mutuality of obligation

• the employer controls the way in which the work is done

• other factors are consistent with employment; these could include:

– level of integration into the business

– the label applied by all the parties

– the nature and length of the engagement

– the benefits received by the individual.

Worker

An individual will likely be a worker if:

• there is an obligation to provide personal service

• there is mutuality of obligation

• they are not carrying out a business and the other party is not a customer

• they do not otherwise meet the test for being an employee.

Self-employed

An individual will be self-employed if they are not an employee or a worker. In essence this means that:

• there is no obligation to provide personal service

• there is no mutuality of obligation

• they are carrying out a business and the other party is the customer.

Whether an individual is carrying out a business and whether the other party is a customer of that business will depend on a number of factors. These could include:

• The employer does not exert a high level of control over the individual.

• The individual is not integrated into the employer’s business.

• The individual actively markets their services.

• The engagement between the individual and the other party is for a relatively short period of time.

• The individual is providing a specialist service.

• The individual invoices the other party for fees.

• The individual supplies the equipment needed to perform the service.

• There is a level of risk attached to the individual (for example, if the work is not completed, the individual does not get paid).

Self-employed individuals and the different frameworks

Importantly, there are different tests associated with whether individuals are self-employed for tax purposes or for employment status purposes.

For tax purposes, a self-employed individual should have a similar set of characteristics to those detailed below:

• The person is in business for themselves and they are responsible for the success or failure of the business. They can also make a loss or profit.

• They have autonomy over the work they do – they can decide what work they do and when, where or how to do it.

• They can hire someone else to do the work.

• They’re responsible for fixing any unsatisfactory work in their own time.

• The client agrees a fixed price for their work – it is not dependent on how long the job takes to finish.

• The person uses their own money to buy business assets, cover running costs and provide tools/equipment for their work.

• They can work for more than one client.

Important points to note:

• A person could still be classed as an ‘employee’ (or more likely a ‘worker’) for employment law purposes and yet be taxed as a self-employed person.

• Individuals can also be employed and self-employed simultaneously – for example, if they work for an employer during the day and then run their own business on evenings or weekends.

Understanding specific terms

Control

An employer can decide what, how, where and when the work is done. Control is less to do with the exercising of day-to-day supervision over the individual and more on the employer’s contractual right to control. By comparison, a self-employed individual will have a greater degree of freedom in their working arrangements. For example, they commonly can determine their own working days and hours.

Mutuality of obligation

In essence, this means that there is an obligation on one party to provide work and the other party, the individual, is obliged to accept the work offered in return for payment. Normally this arrangement will form part of either a written or oral contract between the employer and the individual. However, it can also mean simply that there is a written or oral contract in existence between the two parties. Therefore, even if the contract does not include an obligation on the employer to provide work or an obligation on the individual to accept work in return for pay, that individual will be an employee or worker if the contract is, in all other respects, consistent with employee or worker status.

Personal service

This means that the individual agrees to perform the work or services personally. If the individual has the ability to or can send substitutes in their place, this would be considered inconsistent with an employee or worker relationship. There are limits on this, however, so the right of substitution must be genuine and not be significantly restricted (and ideally be used in practice).

Case study Example 3

Beth is engaged as a self-employed electrician for Electricians & Co. Her contract states that she has the right, without the need to obtain Electricians & Co.’s prior approval, to arrange for another electrician to provide the services in her place. In accordance with the terms of her contract on a day where she was scheduled to work, but has a series of personal appointments, she arranges for her colleague Craig to perform what would have been her jobs. Electricians & Co. does not have a problem with that arrangement. An employment tribunal would be likely to find that Beth’s contract did contain a genuine right of substitution clause and, on the basis of this factor alone, it is unlikely that Beth would be deemed an employee or a worker.

Key points for employers:

There are three main types of employment status:

- Employee
- Worker
- Self-employed

There is no definition of ‘self-employed’ in legislation.
A person is likely to be self-employed where they provide services as part of their business to an entity or customer.
The tests used to determine the employment status of an individual (either employee, worker or self-employed) have been developed through case law and will depend on what the contract says and how the arrangements operate in practice.
Self-employed individuals will have few employment rights, with the terms of the relationship governed by the terms in the contract for services.

Key points for self-employed individuals:

A person can be both employed and self-employed simultaneously.
It is important that a person understands their status, as this is what determines an individual’s employment rights and their tax obligations.
A person may be classed as an employee (or more likely a worker) in relation to employment rights but self-employed for tax purposes.

Summary of key rights and protections

Legal rights

This section sets out the legal rights which are associated with each category of employment status. Employment status is important because it determines what legal rights an individual has. An employer can grant an individual additional employment rights under the individual’s contract of employment. However, the legal rights referred to below cannot be taken away.

Employees benefit from the most protection, including:

• The right not to be unfairly dismissed.

• The right to statutory minimum notice and statutory redundancy pay.

• Family-related rights.

• Certain other rights to time off.

• Protection against discrimination and whistleblowing.

Workers have fewer rights than employees. However, they have a degree of statutory protection which recognises that they are in a subordinate position to the person they work for and so some form of basic protection is required.

Consequently, workers have certain rights relating to:

• Minimum rates of pay.

• Rights under working time and whistleblowing legislation.

• Protection from discrimination.

Self-employed individuals generally only have contractual rights, but they may also be protected:

• From discrimination.

• Under data protection legislation as ‘data subjects’.

The general categories of rights and protections afforded to employees, workers and the self-employed are set out below.

Rights and protections under the Employment Rights Act 1996

Right/protection	Employee	Worker	Self-employed
Right not to be unfairly dismissed (after two years’ service)	Yes	No Note that as of From 6 April 2020, workers are entitled to receive a written statement of particulars.	No
Right to receive written statement of terms of employment	Yes	Yes	No
Itemised payslip	Yes	Yes	No
Statutory minimum notice	Yes	No	No
Statutory redundancy pay (after two years’ service)	Yes	No	No
Protection from discrimination in the workplace	Yes	Yes	Possibly
National Minimum Wage/National Living Wage (if aged 23 and over)	Yes	Yes	No
Protection from unlawful deduction from wages	Yes	Yes	No
Paid annual leave	Yes	Yes	No
Right to daily and weekly rest breaks	Yes	Yes	No
Pension auto-enrolment	Yes	Yes If the worker satisfies the definition of ‘eligible jobholder’.	No
Right to be accompanied at a disciplinary or grievance hearing	Yes	Yes	No
Rights under data protection legislation	Yes	Yes	Yes
Whistleblowing protection	Yes	Yes	Possibly
Statutory Sick Pay	Yes	Possibly The definition for ‘qualifying employees’ under the legislation is wider than under the normal employment status tests and include those whose earnings are liable for class 1 National Insurance contributions.	No
Statutory maternity, paternity, adoption leave and pay	Yes	Possibly The definition of ‘employee’ for statutory maternity, paternity, adoption and shared parental pay purposes is wider than the standard definition.	No
Unpaid time off to care for dependants	Yes	No	No
Right to request flexible working	Yes	No	No
Time off for ante-natal care	Yes	No	No
Time off for trade union activities	Yes	No	No
Protection under the transfer of undertakings legislation	Yes	Possibly The transfer of undertakings legislation defines an employee in slightly wider terms than is normally used for employment protection purposes. The term means any individual who works for another person, whether under a contract of service or apprenticeship or otherwise, although the definition does not include anyone who provides services under a contract for services.	No
Health and safety in the workplace	Yes	Yes	Yes

Protection from discrimination in the workplace

Individuals ‘in employment’ are protected against discrimination. The Equality Act 2010 definition of ‘employment’ includes ‘employment under a contract of employment, a contract of apprenticeship or a contract personally to do work’, which could cover self-employed individuals if the contract obliges them to do the work personally.

Rights under data protection legislation – the GDPR, which came into effect in 2018, protects individuals’ information by requiring businesses to be responsible for how they process the data they collect. Self-employed individuals are protected by the GDPR, which extends to data about employees, clients and suppliers.

Whistleblowing protection

Some self-employed individuals will be protected under whistleblowing protection, for example doctors, dentists, ophthalmologists and pharmacists in the NHS.

Health and safety in the workplace

An employer’s duty, under health and safety legislation, is to protect the health, safety and welfare of not only their employees but also any other individual who might be affected by their business. This includes the self-employed. Employers are under a duty to assess the risks in the workplace and do whatever is practicable to mitigate these risks.

Self-employed individuals should be aware that health and safety legislation may be applicable to them. All individuals have a duty of care to look after their own health and safety in the workplace, but also that of others who may be affected by their actions at work. Self-employed individuals must assess whether the work they are carrying out could pose a risk to others or not. Self-employed individuals should also be aware that where they employ others, health and safety legislation will apply to them.

Upcoming reform

The UK Government’s Good Work Plan was published in 2018 in response to the Taylor Review. One of the aims of the plan is to ensure that both employers and individuals have more clarity as to the nature of their employment relationships and associated rights and obligations. Unfortunately, there remains much uncertainty over the government’s plans for reform.

The Taylor Review proposed a clearer and more consistent definition of ‘worker’ and that workers who are not employees be renamed ‘dependent contractors’. It also proposed placing less emphasis on personal service and more on control in the context of an employer/worker relationship. The government said that it would legislate to achieve greater clarity to determine status, but so far it has given little detail about how it intends to do so. The government has indicated that it intends to develop an online tool to determine status but cannot do this until the legislation has changed. The government published a standalone consultation on employment status in 2018 and in 2022 the UK government published guidance on employment status. This guidance is intended to help HR professionals, individuals and businesses understand which employment rights apply in different cases. It remains to be seen whether more concrete proposals will be forthcoming.

Employment status remains a hotly contested political topic and the subject of much scrutiny and lobbying. The COVID-19 pandemic has brought a renewed focus to the issue of employment status. The House of Lords COVID-19 Select Committee report, published in April 2021, has again called on the government to legislate to clarify employment status.

Key points for employers:

Understanding status is important because it determines an individual’s legal rights and the obligations owed to that individual, as well as how that individual should be taxed.
Employees have the most extensive legal protection, while genuinely self-employed contractors enjoy the least (although they are entitled to certain rights and protections).
Status is not static and can change as the working relationship develops over time.
Be aware of upcoming reforms and developments.

Key points for self-employed individuals:

Employing an individual versus engaging a self-employed contractor – the advantages and disadvantages

Advantages and disadvantages of employee and self-employed status from the employer’s point of view

	Advantages	Disadvantages
Employee status	The employer will have a stable workforce that it can rely on to carry out its business. Employee relationships are likely to last for longer. The employer has control over when and how the employees work. Employees are likely to be the most productive members of staff as they can be incentivised by long-term career development prospects and rewards and benefits. The employer will benefit from longer notice periods, which will give it time to plan for replacements. The employer benefits from greater protections from enforceable post-termination restrictions (for example non-compete provisions).	Employees receive the fullest range of benefits, including for example bonuses, enhanced sick pay, insurances. As a result employees are generally the most expensive type of individual to employ. If the employer ever wishes to reduce headcount, it will be more procedurally difficult and more expensive to dismiss employees. The employer will usually be expected to invest in the employee’s career development and training, which can be an added expense. The employer will need to provide an employee with a workstation and equipment.
Self-employed status	Self-employed contractors are usually cheaper because the company will only need to pay for the time that they are working. The company will also not have to provide any form of additional benefits or invest in the employee’s development unless there is a specific requirement in the contract for services. There is flexibility in the relationship so the person can be engaged during busy periods, while during the business’s down time there is no continuing obligation on the employer to provide work or pay the individual. The employer may be able to hire individuals with the specialist skills required for specific projects that the company is undertaking. The employer will not be obliged to provide a space in the work environment for the individual, thereby also saving costs if the individual chooses to work from home. It is easier to end contractual relationships with contractors than it is end to those with employees.	There is no guarantee that a self-employed contractor will be available and/or willing to do the work when required. It is harder to develop a relationship between the company and the individual, particularly if the project is short. The costs of a specific project may be greater than they would be if existing employees carried out the project work alongside their existing duties. The employer will potentially have less stability in the workforce. The employer will have less ability to protect itself and its business as self-employed individuals are less likely to be subject to post-termination restrictions. A self-employed contractor has more control over where/when and how the work is delivered. This may be a different pattern from the one the employer is used to.

Advantages and disadvantages of employee and self-employed status from the individual’s point of view

Advantages

Disadvantages

Employee status

This type of status offers stability and usually a degree of permanency. This is because the individual would normally be an employee and so a part of the employer’s core workforce.

An individual will usually have greater access to development and learning as part of these will usually be offered by the employer.

There tends to be a better sense of cohesion with other individuals employed at the organisation as employees are usually fully integrated into the employer’s organisation. In practice this means that an individual will have clear reporting lines; they will also be part of a permanent team and will have access to their own workstation and equipment.

Employees will also be subject to and benefit from the employer’s policies and procedures.

Individuals who are employees will also receive the widest range of benefits. For example, bonuses, insurances and enhanced sick pay.

If the individual wishes to leave the employer’s employment, it is likely that the individual will have a notice period that they will have to serve. The length of a notice period can vary, but it is unlikely to be less than one month.

When a person leaves an employer’s employment they may be subject to post-termination restrictions. These can include non-compete and non-solicit provisions in order to protect the employer’s business. These restrictions can be very onerous and can prevent an employee working for a competitor for up to a year.

An individual will have less flexibility over the manner in which they work as employers usually require employees to work certain hours and have a set pattern of work.

Employees can usually not refuse to do work required under their contract of employment.

Self-employed status

Individuals will have more control over what, how, where and when they do their work, so long as any deadlines are met.

Individuals will have the ability to turn down work if they don’t want to do it.

There is the potential for individuals to receive a higher rate of income – in many cases; a person’s hourly rate can be more than an employee’s hourly take-home pay

There is no guarantee of work being supplied and therefore no guarantee of a person being paid.

There is the potential to earn less without the security of regular hours in employment.

There is no access to employee benefits or a workplace pension. This could have significant impact on a person’s outgoings.

There are very few employment law rights and protections.

Key points for employers

There are cost advantages for employers hiring self-employed contractors in that they do not have to pay the individual beyond the length of the project. Moreover, unless the contract for services provides for it, there will be no obligation on the employer to provide additional benefits such as a pension. Employers can also recruit self-employed individuals who are specialists in their field to lead or conduct one-off projects within the business. It is also easier to end relationships with self-employed contractors.
There are advantages also in hiring an employee. The employer can ensure that it will have a stable workforce – employer–employee relationships tend to last longer than those with self-employed contractors. The employer can also be sure that it will retain control over its workforce. Employees also tend to be more engaged and can be incentivised with long-term plans and are more actively involved in the life of the business. The employer will also have the ability to protect itself through the use of post-termination restrictions in its employment contracts and longer notice periods.
An individual’s employment status is determined both by the provisions in the contract and also how the working arrangement operates in practice. Employers need to be aware that employment arrangements and an individual’s employment status can change over time.

Key points for self-employed individuals

Self-employed individuals will retain more control over the parameters of their working lives and the working relationships that they enter into. This form of work can be more flexible and more lucrative. However, it also has the potential to be more uncertain and insecure – genuinely self-employed individuals do not benefit from many employment law protections.
Employees benefit from stability in their working lives. Being an employee brings with it a degree of certainty as the individual will be a part of the employer’s core workforce. There will also be more opportunities to develop professionally and employees receive the widest range of employer benefits. Employees will also benefit from the employer’s policies and procedures (as well as being subject to them) and the widest range of employment law rights.
An individual’s employment status will depend on both their contract of employment (or contract for services) and how the working arrangement actually operates in practice.

Tax and contractors

IR35

This section looks at the tax position in relation to contractors and freelancers with a particular focus on the IR35 reforms that came into force in April 2021.

As stated above, 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.

The tests for determining whether an individual is employed or self-employed for tax/ NICs are very similar to the tests used for employment law purposes (see section 3). However, for tax/NICs purposes no one factor is dominant – it is a case of looking at the circumstances as a whole.

Individual contractors

Where a contractor provides their labour to a client directly as a self-employed individual, there is a risk that HMRC could subsequently re-categorise the contractor as an employee. If HMRC successfully re-categorised a 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.

Special rules apply where an individual contractor provides their labour to a client via an agency. Generally in those circumstances the contractor will be deemed to be an employee of the agency for tax/NICs purposes (resulting in an obligation on the agency to operate PAYE/NICs), unless the agency is able to show that the contractor is not subject to the right of supervision, direction or control by any person.

Contractors providing their labour via a personal services company or other intermediary

Historically, many contractors, rather than providing their labour to their clients directly, contract with their clients via a personal services company (PSC). A PSC is a company managed, controlled and owned by the individual.

Traditionally, there have been a number of advantages for the contractor of using a PSC: it may make it easier for the contractor to obtain work; it gives the contractor the benefit of limited liability; and it may enable the contractor to make tax savings by paying themselves by way of dividends in addition to salary. Traditionally there have also been benefits for clients in engaging a PSC rather than an individual contractor, as it can reduce the risk of the contractor being considered an employee of the business for employment law purposes; also, subject to some limited exceptions, it currently protects the business from the PAYE/NICs risk associated with HMRC subsequently re-categorising an individual contractor as an employee.

However, some years ago HMRC, concerned by the perceived loss of tax through the use of PSCs and as part of its clampdown on disguised employment, introduced IR35. IR35 applies where an individual personally provides labour to a client via an intermediary such as a PSC, and:

ignoring the existence of the intermediary, the individual would be an employee or office-holder (for example a director) of the client, or
the individual is an office-holder of the client and the services they provide through the intermediary relate to that office.

What does IR35 entail?

Before April 2021, where IR35 applied, it was the intermediary (PSC), rather than the client, who was responsible for considering whether the arrangements fall within IR35 and, if so, accounting for PAYE and NICs on deemed employment income. However, since April 2021, it is the client – rather than the PSC or intermediary – who is responsible for assessing whether IR35 applies.

The client must notify the contractor, the intermediary (PSC) and any agency with which the client is contracting of its IR35 determination, together with its reasons, by means of a status determination statement. The client must also provide a dispute resolution procedure giving the contractor the right to challenge the client’s decision if they wish to do so. The client must consider any evidence provided by the contractor and notify the contractor of its decision (and the reasons for it) within 45 days of receiving the contractor’s objections.

If the client determines that IR35 applies, the fee-payer – that is, the entity that has the contractual relationship with the intermediary (PSC) – will be required to deduct PAYE/ NICs from the fees it pays to the intermediary (PSC) (excluding VAT) and account for employer NICs and the apprenticeship levy. The fee-payer will be the client if there is no UK agency in the labour supply chain.

If the client determines that IR35 does not apply, the fee-payer can continue to pay the intermediary (PSC) gross.

‘Small’ clients are exempt from these rules. There are special rules (including anti-avoidance rules) for assessing whether a client is small for these purposes, relating to financial performance and employee headcount.

Similar rules have applied in the public sector since April 2017.

The IR35 rules only apply for tax and NICs purposes. The new rules do not affect status for employment law purposes.

Further, since April 2021, the off-payroll working rules in the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) now apply to medium and large private sector entities with a UK connection. These rules are relevant when engaging an individual to provide consultancy services via a PSC. They apply to payments made on or after 6 April 2021 for services supplied on after that date. In practice, the extension of these rules may result in fewer individuals being engaged to provide consultancy services via a PSC.

What businesses must do

Outlined below are five steps businesses must take to account for IR35. Ideally, businesses will have undertaken these steps well in advance of the implementation of IR35 in April 2021. However, if that has not happened, these steps must be followed immediately.

Step 1

Identify individual(s) in the organisation who are responsible for ensuring that the business is compliant with the new IR35 regime and ensure they are suitably trained in making IR35 determinations. These individual(s) will likely either be in HR, finance or legal.

Step 2

Identify those contractors supplying their labour through a PSC or other intermediary.

Contractors could be providing labour:

(a) direct as PSCs (that is, the contractor is a limited company)

(b) direct as sole traders (that is, the contractor is an individual)

(d) via a supply agency or other employment business as sole traders.

For the purposes of IR35, you need to identify those contractors who fall into categories (a) or (c).

Step 3

Audit the arrangements to assess which of the contractors fall within IR35 and which fall outside IR35. Ensure a clear and consistent methodology is used.

HMRC has a Check Employment Status Tool (‘CEST’) at www.gov.uk/guidance/check-employment-status-for-tax to help businesses make the IR35 determination. While businesses are not obliged to use CEST, it has the advantage that the CEST result is binding on HMRC provided that the relevant information has been correctly inputted into CEST. However, CEST has been heavily criticised. In some cases it does not provide a determination and in others the determination seems heavily biased towards a finding that IR35 is applicable. While the government has reiterated its commitment to improving CEST and also putting in place an education and support package for businesses, businesses should have a robust system in place for assessing employment status, particularly in those circumstances where the business and/or the contractor disputes the CEST result.

Step 4

Communicate the IR35 determination and the reasons for it to the contractor, their PSC and the agency.

Step 5

Consider any documentation and systems changes that are required. For example:

Review internal processes for obtaining approval to use contractors and on-boarding processes. This could include, for example, having an authorised list of supply agencies and ensuring that there is a signed contract with the PSC or supply agency before any work is done.
Update template contracts for PSCs and supply agencies to incorporate IR35 changes and tax and status indemnity and warranty protections as appropriate. Ensure that your contracts reflect the status determination.
Ensure that payroll and accounts payable systems can deal with the implications of a determination (and that VAT and PAYE/NICs can both be operated where appropriate).

Key points for engagers

It is notoriously difficult to determine employment status. Taking a ‘blanket approach’ of applying IR35 in all cases risks legal challenges from both the individuals and those responsible for paying them. Accordingly, ensure that you have a robust procedure in place for determining employment status.
Clear communication with the contractor is vital. If you determine that an arrangement is within IR35 and the contractor is business-critical, budget for the additional costs.
Making the assessment and implementing changes to procedures and documentation will take time.
Consider whether contractors using PSCs are truly the right solution for your resourcing needs.

Key points for contractors

How to decide what contract to use

What to consider

This section considers, in brief, the differences between an employment contract (a contract of service between an employer and employee) and a contract for services (a contract between a business and a self-employed individual).

Employment contract

This is in effect a contract of service between an individual (employee) and a business (employer). The difference between this and a contract for services is the fact that in providing a ‘service’ a person is in effect providing themselves permanently to that business. An employment contract should include standard contractual provisions, including in relation to notice, pay, holiday, benefits, and so on.

Contract for services

A contract for services is a formal, legally binding agreement between a business and a self-employed individual which reflects a contractor–client relationship. The contract should relate solely to the specific services that the individual has been contracted to carry out. Where a person is engaged with a business under a contract for services, they are unlikely to benefit from many employment rights or other benefits, such as access and contributions to pension schemes. Nonetheless, employers should be aware of the factors that could indicate worker or employment status.

Recent and upcoming reform

Please refer to Tax and contractors (above) for information on IR35 and Summary of legal right and protections (above) for information on the potential reforms under the UK Government’s Good Work Plan.

Acknowledgments

Lewis Silkin

Lewis Silkin is widely recognised as the leading specialist employment law practice. With a team of over 150 employment and immigration lawyers, based across the UK, Ireland and Hong Kong, the firm supports clients across the full spectrum of employment law and related HR needs. Lewis Silkin has been consistently top ranked for employment law for the past 15 years by independent legal directories, Chambers and Legal 500, and received global recognition from Who’s Who Legal having twice been named ‘Law Firm of the Year for Labour, Employment and Pensions’.