Not knowing the rules governing employee or self-employment could cost thousands

The employment status of a worker can be a veritable minefield for an employer if the decision is wrong. If an employer decide the status of a worker is self-employed person and treat the worker as self employed rather than deducting tax and national insurance the employer could be at risk of incurring a major financial liability for the tax and national insurance deductions if the worker's status is subsequently changed following an Inland Revenue.

If the status of a worker moves from self-employment to employee by the Inland Revenue the amounts paid to that employee would be considered by the Inland Revenue as it is not the gross wage, but the net pay after taxes on income and 'national insurance. The new assessment after adding the income tax and both employee and employer national insurance could increase the cost of that worker by more than 50%.

If an employment status of workers is determined as incorrect by the tax authority the date on which employment status was used rather than self-employment also be determined. Such a change of status and the date of application could be applied retroactively several years leading to a significant financial burden.

An employer can not choose the status of a worker or self. The status of the worker depends on the rules of engagement and work practices that result. There is also a tendency to long-term commitment to self-employed workers for circumstances to change and some changes may change the status of that worker from self employment to the employee in view of the IRS.

The first fundamental question to be solved by an employer if the worker is hired with a contract of employment or whose services are contracted. Because of the potentially serious financial consequences of making the wrong decision, it is important that the rules of engagement are defined and agreed in writing.

There is no legal definition of what constitutes an employment contract and what constitutes a service contract relating to income tax and national insurance. In the absence of a statutory definition the interpretation of the nature of the relationship is open to debate and previous court decisions.

The general rules indicate that a worker was an employee would include scenarios such as the work is supervised, it was a person when, what and where the work is done and how it should be done. The employee may be moved from one task to another and does the job worker to set the hour and paid on the basis of a set of bonus schedules, weekly or monthly or receive payments or overtime. The existence of these conditions do not indicate the status of employee self-employment.

There are many other factors that can determine the status of employment, for example, if a worker takes home every day commercial vehicle that indicate the status of employees. If the worker to provide their own tools and equipment to perform the tasks and the costs of doing this then self employment would be indicated, but the employer must provide such equipment then workers status is more likely to be interpreted as an employee.

The factors that can determine the self-employment should include the employee in someone else to perform the tasks at their own expense if the work contained personal financial risk to the worker, has agreed a fixed price regardless of the time taken to perform the work. Other self employment factors would be if the worker can choose when and how to perform tasks, whether they work for other organizations and whether unsatisfactory work has to be corrected in time, the workers at his own expense.

The conditions under which a worker is engaged can be ambiguous and that can lead to problems such as long-term self-employed workers and the relationship with the employer over time tends to slip in a model that could be interpreted as being closer to that of an employee, rather than self-employment. In those circumstances which may have started as self-employment can then be interpreted as employment, in which case the spectrum of those workers is increased cost to the business by 50% will spend years ago could become a reality.

In all cases where there is doubt about employment status of the final decision becomes one of providing evidence and the weight of evidence for one side or the other. Often individual cases can be based on what may have been regarded as insignificant items at the time. For example, the granting of benefits to workers normally associated with employment such as paid leave and also items such as access to subsidized canteen services can weigh the balance in favor of employment.

If an employer has doubts about the status of worker rules of engagement must be in writing, in advance and clarify the status of an employee or self-employment. If there is any doubt then the safest practice would be to treat the worker as an employee and deduct income tax and national insurance, or engage the worker under the rules of the CIS sub contractors.

As a rough guide to the financial consequences of making the wrong decision or circumstances changing the status of a worker from self employment to employment without deducting tax and national insurance, consider this example.

The employee has performed work for the company for 3 years as a self-employed and was paid £ 25,000 a year. The normal working model is interpreted by the Inland Revenue as to an employee, not self-employment.

The Inland Revenue could determine income of 5,000 pounds and national insurance of 2,000 pounds should have been deducted by the employer national insurance of another 2,000 pounds. Over three years the bill to get the wrong decision could cause an unexpected bill for the employer of 27,000 pounds. For a small business that level of additional costs could be the difference between survival and liquidation .......