Hope the title made sense.

I have been asked the following but want to check here before I advise.

A chap I know has been working for a firm but was classed as self employed. When he told me the arrangement I said to him, you will have to be careful as that does sound like you are employed by this company. It was the company who wanted him to be self employed (avoid the employers NI I guess)

Anyway a while back he told me the revenue are looking into the company and now he has said that the company have been told he should have been employed rather than self employed.

Now he has quite a tax liability to pay which I worked out based on his self employment status. He has not paid this and they have not chased it. In fact they have now wrote to him saying that they will not be sending him anymore returns.

So he has asked me if he should send the revenue a cheque for what we calculated is due.

My guess is the company is liable and should recover it from him? Is this correct?

Thanks
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Hi Derren

I think it depends what HMRC have arranged with the employer.
If HMRC think he was not self employed, then he doesn't owe income tax and Class 4 NI under self assessment. However, if he has effectively been paid gross, he still owes tax in some way or another.
The onus is on the employer to sort it out - though your chap should be making provisions for paying tax at some point. If HMRC aren't chasing it, I wouldn't pay a cheque, but would definitely contact HMRC to see where he stands.
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I am self employed, and am registered with HMRC as such. But even so, the nature of one's relationship can still influence HMRC's "interpretation" of this status.

The status of being self-employed starts with this process (above), but it continues thereafter by:-

1. The nature of the CONTRACT you enter into with the client company.
There is a difference between a Contract For Services, and a Contract Of Services... the word "FOR" is very significant here, and all contracts that are to be regarded as being between a contractor and a client should be headed "Contract For Services" and not "Contract Of Services". The way the terms of such a contract are set out is also important.

2. HMRC is also interested to know if you work with just one "client", or several clients. If you have just one contract, and it's "long term", HMRC may take the view that this is de facto an employment situation, unless you offer sufficient explanation as to why you are on such a "long term" contract with one organisation.

I know very little about employment law, but understand that - even as a "contractor", an employer (client company) may have some obligations with regard to your employment welfare, if your period of consultation is lengthy.
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In addition to fairestcape's comments, key factors which point at self employment not employment are


Right of control - can the 'boss' order him around?
Right of substitution - if he isn't able to attend, can he send someone else to do the work instead, in theory?
Financial risk - if he makes a mistake, does he have to bear the cost of putting it right?
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The question of employment status is very wide, too wide to go into in detail. Nobody is "registered" as self employed with HMRC - they may indicate that to HMRC they are self employed and receive self assessment returns, but that does not express HMRC opinion on their status. It is perfectly possible to have engagements with some people on a self employed basis, while other engagements should be treated as employment.

As a potential "employer" or main contractor it would be reckless to rely on a claim of "registration" to treat somebody as self employed. It's down to a number of factors, and each case is different. The risk lies solely with the "employer" - get it wrong and HMRC will look to you for the tax. It's also not unknown for the "subcontractor" to have a sudden change of mind after the event, claim employment status, unfair dismissal or holiday pay!

And most HMRC inspectors out on the street know next to nothing about employment status. If you quote cases to them in support of self employment, they've never heard of them. It is my considered opinion that they go out with the objective of reclassifying as many subcontractors as possible as employees, with little regard to the facts and using pressure tactics that are little short of bullying.
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HMRC have a tool on their website to assist in status identification.

https://esi2calculator.hmrc.gov.uk/esi/external-cod.html
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David is spot on with the range of factors that can determine employment or self employment and HMRc can often ask seemingly innocent questions to the uninitiated, conversations regarded as chit chat by the layman.

Example:
HMRC "Lovely day today Mr Self employed, going out in the van (works van)?
Self employed "Yes, later got a job to sort out other side of town."
HMRC "Useful having the van, does the boss let you take it home at night?"
Self employed "Yeah he's quite good like that"

HMRC to employer "This man is employed not self employed as he uses a company vehicle to travel to work and keeps it at home overnight"

And the financial penalty
The money paid to the "self employed" will be regarded as net wages after deduction of income tax and national insurance. So in the past 2 years you have paid him ?0K p.a. so HMRC calculate his gross wages are ?10 per week and demand.

2 years income tax ?,400, 2 years national insurance ?,600, 2 years employers NI ?,400 Total HMRC demand ?8,400 (approx only)

The employer is responsible as it is his responsibility to operate a paye scheme for this employee. The self employed individual could claim back tax paid under the self employment rules since the employer has been judged responsible making the self employed tax already paid a duplicate tax payment on the same income.

Additional information I wrote a while ago can be seen at:
http://www.diyaccounting.co.uk/articles/tax_business/employee_self_employed.htm

Employment or self employment is an area that can cause major financial problems and distress for both employee and employer and employers should be careful to avoid such interpretations as it is an area HMRC investigate during an inspection.
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HMRC have a tool on their website to assist in status identification.




Or more cynically, HMRC have a tool which will telll you that the person concerned is an employee and not a self employed contractor.

If you put in the facts of several cases, the tool gives the wrong answer. Strange how when they get it wrong it always says employee. ;)
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Or more cynically, HMRC have a tool which will telll you that the person concerned is an employee and not a self employed contractor.

If you put in the facts of several cases, the tool gives the wrong answer. Strange how when they get it wrong it always says employee. ;)

I must admit that I've never used HMRC's status tool myself, just been aware of its existence. I've always worked status issues manually and on a case by case basis but that said I'm not in the slightest bit surprised to learn of David's findings when using the HMRC tool!
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