Income tax - employers

Guidelines for employers on determining employment status - payment of fees.

After reading this you should be able to determine the employment status of a person who claims they are self-employed and intend to submit invoices for work done.

It is the responsibility of employing departments to determine the employment status of a person, i.e. whether they are employed or self-employed.

HM Revenue and Customs no longer issues letters stating that an individual can be treated as self-employed for work undertaken for the county council.

Self-employed status allows a gross payment to be made to an individual whereas payments to employees are subject to income tax and National Insurance.

The terms of each individual's working arrangement require consideration in order to determine how they should be treated. It is not sufficient for the individual to say they are self-employed even though they may submit an invoice and state that they return their income to the Inland Revenue. A person can be self-employed for one job but not for another.

You may already hold a letter from HM Revenue and Customs confirming that an individual may be classed as self-employed for a particular area of work they undertake for the county council. However, the onus is on the department to verify that the terms of the engagement remain unchanged. Each individual must fulfil the criteria shown below.

The following points should be taken into account to determine an individual's status but they are not conclusive:

Control
Provision of equipment
Terms of payment
Financial risk

Control

The degree of control exercised over an individual is an important factor. If they are instructed what to do, how and when to do the work, then it is likely that they are an employee. Also, if the council has the right to control the worker but chooses not to exercise that right, it is a pointer towards employment. However, if the person is given a task to complete by a certain date, but he/she can decide how and when to do the work, they could be self-employed.

If the individual is free to hire and pay someone to assist them or to do the work in their place, this also suggests self-employment.

Provision of Equipment

An employee is provided with equipment and materials to carry out their job. A self-employed person would be expected, at the minimum, to provide their own small tools and items of equipment and materials.

Terms of Payment

There would normally be an agreed price for the job to a self-employed person that would include any expenses and overheads. However, payment by an hourly, daily, weekly or monthly rate, which is dictated by the employer, is a pointer towards employment.

Financial Risk

A self-employed person would:

be expected to put right any substandard work in their own time and at their own expense
risk their own capital
make a loss or a profit

These points would not apply to an employee.

As the employment status affects the income tax and National Insurance a person has to pay, it is important that the correct decision is made. It is in your interests to verify a person's employment status correctly as any underpayment of tax and National Insurance would be met from your budget.

This is a complicated topic and after considering the above points, it may still not be clear whether a person can be treated as self-employed. Further assistance can be obtained from Glenis Petts 01629 580000 extension 7860.

Where an officer decides that an individual satisfies the criteria for self-employment, they must mark the invoice "Self-employed status confirmed - gross payment required" and sign their initials.