When engaging with individuals who are not permanently employed by your organisation, you need to be aware of the legal frameworks which govern pay, tax and national insurance compliance. There are two sets of rules which hiring organisations need to be particularly aware of. These are, the agency worker regulations (AWR) and the tax and national insurance rules encapsulated by the term ‘IR35’.
These rules have evolved over the years to protect the rights of workers and strengthen compliance within the temporary worker supply chain. The rules themselves should not present a problem so long as they are understood and planned for at the start of the engagement. You will need to assess if each of the sets of rules apply and what the implications of application are. This guide should give you an idea of what to do and if you need more information or guidance, please get in touch.
Overview – it’s not as bad as it might sound
These pieces of legislation and associated guidance may seem like a minefield but at its heart, it is straightforward.
The determining factor in the application of both sets of rules is the nature of the relationship between you the hirer and the individual providing the service. In essence, the more the relationship looks and feels like one of employee and employer, the more likely these rules are to apply and the more care needs to be taken in the setup of terms and conditions. It makes sense that employment carries many valued rights and responsibilities, the more you create this kind of relationship the closer the tie of the individual to your organisation, and the greater your obligations are in return.
In both cases, for the purposes of determining if the rules apply, the agency can be ignored for the most part. The relationship concerned is the one between the employer and the service provider themselves.
AWR governance of pay and terms
AWR has a relatively straightforward test which is, is the worker is provided via an employment business and is subject or entitled to supervision, direction or control by someone at your organisation? If so, then you must apply the rules. These rules, very broadly entitle the agency worker to be paid no less than a permanent peer at your organisation and affords them the same rights to conditions such as holiday and preferential shifts.
Full details of the rules are set out below:
IR35 governance of the operation of PAYE on income paid to a temporary worker
IR35 has a much more detailed assessment of the worker / hirer relationship and you will need to consider a more rounded set of factors than the AWR which simply looks at the presence or entitlement to supervision, direction or control.
First and foremost, you need to consider if there is a specific need for personal service. This means if it does not matter to you who turns up to do the role, then the worker or their limited company or partnership does not fall into the initial definition of an intermediary for the IR35 rules and the rules do not therefore apply.
Once you have established the requirement for personal service, you need to consider other factors to decide if you hold a ‘hypothetical employment contract’ with the worker. When making this assessment you should remember to look at the picture as a whole. Some of the factors carry more weight than others with HMRC but there is no one deciding factor once you have a qualifying intermediary. The key factors are;
Control: It is a feature of employment that the hirer has the right to tell the worker what to do or where, when and how it is to be done. The extent of control may vary. A hirer will probably exercise more control over an unskilled worker than over a skilled craftsman. However, a working relationship which involves no control at all is unlikely to be an employment.
Basis of Payment: Employees tend to be paid a fixed wage or salary by the week or month and often qualify for additional payments such as overtime, long service bonus or profit share. Self-employed workers on the other hand, tend to be paid a fixed sum for a particular job.
Financial Risk: An individual who risks his own money by, for example, buying assets and bearing their running costs or paying for overheads and large quantities of materials, is almost certainly self-employed. Financial risk could also take the form of quoting a fixed price for a job, with the consequent risk of bearing the additional costs if the job overruns. However, this would not necessary mean that the worker is self-employed unless there is a real risk of significant financial loss.
Opportunity to Profit from Sound Management: A person whose profit or loss depends on his capacity to reduce overheads and organise his work effectively may well be self-employed. People who are paid by the job will often be in this position.
Employee Benefits: Employees are often entitled to sick pay, holiday pay, pensions, expenses and so on. However, the absence of those features does not necessarily mean that the worker is self-employed, especially in the case of short-term engagements.
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 in a contract for services, which usually ends only on completion of the task, or if the terms of the contract are breached.
Length of Engagement: Long periods working for one contractor may be typical of an employment but are not conclusive. It is still necessary to consider all the terms and conditions of each engagement. Regular working for the same hirer may indicate that there is a single and continuing contract of employment.
Part and parcel of the organisaion: Examples of behaviours that suggest being part and parcel of the organisation would be if the worker is scheduled into future plans of the business, they are a key member on an ongoing assignment, that they have supervisory responsibilities for other members of staff.
Mutuality of obligations: If there is a reciprocal and ongoing expectation or requirement that the employee returns day after day to continue to receive work and payment, the relationship is more akin to an employment. A self employed individual by contrast would finish a piece of work then likely have to quote for the next one if there is any further work available.
Personal Factors: In deciding a person’s employment status it may sometimes be necessary to take into account factors which are personal to the worker and which have little to do with the terms of the particular engagement being considered. For example, if a skilled craftsman works for a number of engagers throughout the year and has a business-like approach to obtaining his engagements (perhaps involving expenditure on office accommodation, office equipment, etc) this will point towards self-employment. Personal factors will usually carry less weight in the case of an unskilled worker, where other factors such as the high level of control exercised by the engager is likely to be conclusive of employment.
Intention of the Parties: 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. However, if other factors are equally balanced, the intention of the parties will then be the decisive factor in deciding employment status
After considering these factors and any other factors you feel are relevant, if you feel that you are unable to make a decision, you can use the HMRC’s on line tool to determine the status but you are not bound to do so.
The tool can be found at:
Once I have established employment status for tax and NI purposes, what then?
If you are engaging an individual who is deemed to be an employee, the earnings attributable to the work they are paid for will be subject to PAYE as in any employment relationship. The national insurance element will be due from the employee but also from the employer, which represents a cost to the engagement which needs to be factored in at the start.
Significant changes to the IR35 rules were introduced from 6 April 2017. These rules do not impact whether or not the PAYE is or is not due, but determines who should collect the PAYE due and pay it to HMRC.
If you are a public sector organisation (defined in this context by being subject to the freedom of information act), the party responsible for paying over the PAYE is the party who pays either the worker or their limited company.
Therefore, if you are contracting directly with a contractor or their personal service company, your organisation will be the deemed employer for tax purposes. As such, you will need to pay the tax and NI under your own PAYE scheme.
If you are a public sector organisation working via an agency, i.e., it is the agency pays the worker or their limited company, it will be the agency who becomes the employer for tax and NI purposes and is responsible for paying the PAYE to HMRC along with that of its own employees.
You should note that under the new rules, the public sector hirer is duty bound to provide a determination of employment status to the agency so that they are able to decide if PAYE should be operated on the payment or not. There are provisions for the PAYE liabilities to pass up the chain to the hirer if they do not provide the determination in a timely manner.
If you are a private sector employer, (ie you are not subject to the freedom of information act), it is the workers limited company or the worker themselves who must account for the correct income tax and national insurance. If there is an employment relationship, the same employer NI will be due on the fee paid to the limited company so as the hirer may wish to attain confirmation from the worker that the NI is being correctly accounted for to ensure tax compliance within your supply chain.
It should always be remembered that in every situation where an employment relationship is deemed to exist, the total costs attributed to the worker are almost identical however the contractual chain is organised. The only material difference is which entity collects and pays the liabilities to HMRC.
If the relationship is one of self-employment, ie the individual is truly in business on his or her own account, there is no obligation on anyone to apply PAYE to the earnings. The income can be paid to an individual or personal service company without a deduction of income tax or the payment of National Insurance.Back to top ↑