Under a provision commonly called IR35, HMRC can retrospectively claim tax where a worker operating through a personal service company (PSC) turns out to have been in an employment relationship with their engager.
At the moment the liability for this unpaid employment tax rests with the PSC, but next April this will switch to the engager, any many employers are already examining the relationship they have with PSCs to ensure they are not open to the risk of IR35 tax claims from HMRC.
In the public sector this change took place in 2017, and Prospect via its BECTU Sector already has extensive experience of working with employers to ensure that the new rules do not undermine the position of members who are genuinely self-employed for tax purposes.
Prospect has supported members cases where members were being categorised as employees, despite many years of self-employment.
There was also an impact on self-employed sole traders, not working through PSCs - engagers have always carried the liability for any unpaid employment tax owed by sole traders, and the some employers decided to apply its new status determination process to all freelance workers.
As private sector companies assess the scale of changes they may need to make in April 2020, they could insist workers have to switch onto PAYE, even though they are a registered PSC who incur business expenses that have to be paid out of their fees.
A worker's employment status depends on the exact nature they have with any engager or employer they are providing services to within their current contract. Self-employed status, for PSC workers and sole traders, does not automatically flow from their historic employment relationships with engagers, nor from the fact that they have registered as self-employed with HMRC and have a Unique Taxpayer Reference (UTR) number.
This, understandably, has caused confusion and anger when members used to being paid gross, without tax being deducted on the grounds that they are self-employed, are told that they are actually employees and will need to move to PAYE.
Steps to Take
Prospect recommend obtain a Lorimer letter. This is a document from HMRC confirming the circumstances in which the holder should be treated as self-employed. Possession of a Lorimer letter is a good way of establishing your status.
Another area to be mindful of if your engager wishes to use the HMRC Check Employment Status Online (CEST) website, Prospect have from its inception stated this is a deeply flawed mechanism.
Members who run into problems with engagers over employment status are being advised by the union to ask which steps were taken to reach a decision, and, in particular, whether CEST was used.
If so, they can ask for the audit trail of the checker's questions and answers, and then re-run the test themselves, inputting their own answers. If this produces a different result they can begin a discussion with the engager about their correct status.
If an engager puts a worker on PAYE, Prospect’s advice should be sought in order to try and correct this decision. Prospect will continue to update members on the private sector IR35 changes in the run up to April 2020.