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You can be a worker or an employee even if you are paid through your own limited company

Posted On: [01/09/2021]

Off-payroll Working

People sometimes work through an intermediary, such as their own personal services company. Companies generally label these arrangements as self-employment or a contract for services, but a person working under these arrangements could be an employee for tax purposes.

HMRC Rules on  Off- payroll working, known as the IR35 rules, mean that individuals who would have been an employee for tax purposes if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees. This is separate from the legal status investigation that is carried out by employment tribunals when a person claims for holiday pay, National Minimum Wage, unfair dismissal or discrimination. You can be self-employed for tax purposes and still be an employee or worker.


Understanding off-payroll working (IR35)

Check your employment status for tax purposes

Employment Rights of Workers and Employees

How to work out if you are an employee or self-employed

The following key issues are considered by tribunals when determining the employment status of a person:

Employee Status

An employee has an ongoing right to expect to be provided with work and an ongoing obligation to accept work (this is known as “mutuality of obligation”). Employment is also marked by a high level of control over how and when the employee performs the work and a high level of integration into the employer organisation (for example the individual regularly represents the employer, appears to be part of the business and must comply with their rules and procedures).

Along with the rights of workers set out below, employee rights include the right not to be unfairly dismissed (subject to qualifying length of service), statutory minimum notice and statutory redundancy pay.

Worker Status

worker has a contract to perform the service personally and there is no client/contractor relationship. A worker will usually be distinguished from an employee because there are no guaranteed hours of work and the worker can turn down work when it is offered (there is no ongoing mutuality of obligation).

Workers’ rights include statutory minimum paid holiday, statutory sick pay (if eligible), National Minimum Wage and protection against discrimination. A worker is treated in the same way as an employee for tax purposes.

Self-employed Status

A truly self-employed person is in business on their own account and markets their services “to the whole world”. They are not required to provide personal service. In other words, they have the freedom to send someone else to perform the work when they are unable or unwilling to do so. A self-employed person will usually have the power to negotiate their own terms and takes a financial risk in the arrangement, for example not getting paid if the work is not satisfactory.

A recent case

In the case of Community Based Care Health Ltd v Dr Reshma Narayan,  Dr Narayan worked for 11 years as an out of hours GP provided by Community Based Care Health Ltd (CBCH). She also performed services as a locum GP through a locum agency and had set up a company through which she processed her pay. She did not tell CBCH about the company and did not submit invoices to them, but she passed on her company bank account details to CBCH. After some concerns about her conduct, CBCH wrote to Dr Narayan and told her she would no longer be offered work. Dr Narayan sued them for unfair dismissalwrongful dismissal, unlawful deductions from wages (for holiday pay), breach of contract, race and sex discrimination in the Employment Tribunal.

The Employment Tribunal said that Dr Narayan was not an employee because there was no obligation for CBCH to give her work, and she had no obligation to accept work from CBCH even though she had carried out the same regular shifts for a long time. Also, her arrangement with CBCH meant that she could turn work down when she was unwilling or unable to carry it out.

Instead, Dr Narayan was a worker. This is because she provided a personal service,  CBCH was not a client of Dr Narayan or her company and there was a considerable degree of control by and integration into CBCH. In practice, Dr Narayan would ask one of her colleague GPs if they could cover a shift, but the replacement would be arranged and paid for by CBCH. This was not a case where a substitute could be sent to perform the work with no control by CBCH over who was chosen (which would be more likely to indicate a self-employment arrangement).

CBCH appealed to the Employment Appeal Tribunal (EAT), but the EAT disagreed with their argument that Dr Narayan could not be a worker because her company was receiving her remuneration, unbeknown to CBCH. The EAT said that the contract was between CBCH and Dr Narayan as an individual. This was because the person  contracting with CBCH to perform the out of hours service had to be a qualified and approved GP and a company could not fulfil this requirement.  In addition, Dr Narayan worked only for CBCH and the locum agency.

What does this mean?

This means that even if you make contractual arrangements that are labelled as “self-employed”, the Employment Tribunal can find that the arrangement was mislabelled and that you are actually a worker with rights to statutory minimum paid holiday, statutory sick pay, National Minimum Wage and protection against discrimination. It means that it doesn’t really matter what the person employing you calls the arrangement. The Employment Tribunal will look at the reality of the relationship. If you win an Employment Tribunal claim you would be awarded underpayment for holiday pay or NMW, be found to have been unfairly dismissed or discriminated against. unfair dismissal compensation is capped at the lesser of one year’s gross salary or £86,444 in addition to the basic award which is equivalent to statutory redundancy pay. discrimination claims are uncapped and assessed on the basis of financial loss and injury to feelings.

For the company employing you, HMRC / the tax tribunal may determine that tax arrears, penalties and interest are due if the arrangement is found to be one of employment. HMRC can investigate tax arrears going back a number of years. The number of years depends on whether HMRC consider the non-payment to have been an innocent mistake (up to 4 years), careless (up to 6 years) or a deliberate evasion (up to 20 years). Penalties of up to 100% of arrears can be charged. Penalties for a failure to notify will be higher than those where voluntary disclosure occurs.