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Does it really matter to the
taxman whether I am employed or self-employed?
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There are many reasons why the Inland Revenue
would argue that individuals are employed as opposed to self-employed.
Self-employed individuals can claim expenses,
which are 'wholly and exclusively' incurred for business purposes.
For an employee it is much more difficult to claim expenses as
they need to be 'wholly, exclusively and necessarily' in the performance
of their duties. Therefore it is more beneficial for a taxpayer
to be self-employed, as they will receive tax relief on more types
of expenses, which will reduce the amount of tax payable to the
taxman.
Many employed individuals do not need to complete
a tax return and therefore the Inland Revenue saves time, effort
and cost if the individual is taxed under PAYE. Although its likely
that most doctors will be higher rate taxpayers and they be required
to complete a tax return. Higher rate taxpayers should pay the
higher rate of tax on investment income such as interest received
on bank and building society accounts.
Status of GP's
GP Principals working in practice are normally
self-employed. Salaried GP's, GP registrars, retainers and assistants
and also long-term maternity locums would be employed by the practice
and taxed under PAYE.
Self-employed GP's may have hospital appointments
and strictly speaking this income would be treated as employment
income and tax deducted under PAYE. However the Inland Revenue
does allow these receipts to be paid gross and taxed with other
self-employed income. If the money is pooled in the practice then
this is preferable.
Hospital doctors are employed. Some consultants
may have private practices and this income is treated as self
employed.
A locum who covers for a GP in practice will
be treated as self employed. If a locum is supplied by an agency,
but is engaged to cover a GP in practice then they would still
be treated as self employed and this does not come under the agency
legislation. The agency legislation applies only where individuals
are subject to the right of, supervision, direction or control
as to the manner in which they render their services. In this
instance the agency would be required to operate PAYE. Doctors
supplied by an agency to work in a hospital are regarded as being
supervised and therefore will come within the agency legislation
and be treated as an employee of the agency.
Deciding an individual's status
The status of an individual may sometimes
be unclear and unfortunately there is no statutory definition
of employed and self employed.
To help decide an individuals' status there
are factors, known as badges of trade that can be considered in
determining whether an individual is employed, or self-employed.
Some of these factors are as follows:-
Control
If an individual has a right to exercise control
over the amount of work done for the engager then this is more
likely to be a self-employed basis. If an individual has no control
to the amount of work done they are likely to be an employee.
Provision of Equipment
A self-employed individual would generally
provide whatever equipment is needed to do the job. Where an individual
is provided with office space and other equipment this would point
towards employment.
Financial Risk
An individual who risks his own money by bearing
capital/running costs is almost certainly self-employed. Financial
risk could also take the form of quoting a fixed price for the
work and bearing additional costs. For example if the actual costs
are more than the price quoted, a self-employed individual will
bear the loss.
Basis of payment
Employees tend to be paid a fixed wage or
salary by the week or month.
Part and parcel of the organisation
If the individual has a role within the business
structure, and is responsible for other employees, then this may
point to being an employee of the company.
Right of dismissal
A right to terminate an engagement by giving
notice of a specified length is a common feature of employment.
It is less common for self-employed, which usually ends on completion
of the task.
Employee Benefits
Employees are often entitled to sick pay,
holiday pay etc. However the absence of these does not necessarily
mean that the individual is self employed.
Length of engagement
Long periods working for one engager may be
typical of an employment, but not conclusive. It is still necessary
to consider the terms and conditions of each engagement.
Intention
It is the reality of the relationship that
matters. It is not enough to call a person self-employed if all
the terms and conditions of the engagement point towards employment.
The above factors can only be used as a guide
in deciding an individual's status. The Inland Revenue will look
at the overall picture. Is the individual in business on his or
her own account or are they a person working as an employee in
somebody else's business.
If you are an employer and want to decide
whether someone should be treated as employed or self-employed
and are not sure, then you should seek professional advice. The
individual may also be legally entitled to the rights of an employee
even if they are being paid gross. If the Inland Revenue subsequently
hold that the individual is an employee, it is the employer who
will be liable for the PAYE and employer's national insurance
as the money you have paid will be treated as net pay.
Limited Companies and IR35
The IR35 legislation was introduced to attack
situations where an individual sets up a personal service company
between himself or herself and the main contractor or client.
From the Inland Revenue's point of view it was designed to correct
avoidance of national insurance contributions where the owner
of the company took most of his/her remuneration as a dividend.
If you have recently set up a limited company
and are only working for one main client then you may need to
seek advice as to whether you fall into IR35. The important issue
regarding IR35 is if without working through a company the arrangement
would be that of employment then you are likely to fall into IR35
unless you have an employment proof contract.
October 2003
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