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Categorisation of earners for NIC purposes
21 September 17 | By: Jas Jhooty
Similar to the income tax provisions it is not a matter of choice if someone is employed or self-employed for National Insurance Contribution (NIC) purposes. You have to examine the facts surrounding the actual relationship between the individual and the engager.
Self-employed or employed?
In most cases it is obvious whether someone is employed or self-employed. However, in cases where attempts have been made to obfuscate the real position, legislation has been introduced classifying an individual as an employee where there is any element of supervision, direction or control.
The intention is that anyone who is an employee should pay income tax and Class 1 NIC through the payroll and anyone who is self-employed should pay Class 2 and Class 4 NIC. However, there are some professions who have their NIC position determined by the NIC regulations (e.g. office cleaners have to be classified as employees) whilst the income tax position is determined by utilising the standard employment status tests.
The regulations define an employed earner as a person who is gainfully employed in the UK either under a contract of service or in an office (including an elective office) with emoluments chargeable to income tax as earnings. Company directors are therefore employed earners by virtue of holding an office. The same provision goes onto define a self employed earner as “a person gainfully employed in Great Britain otherwise than in an employed earners employment.”
What this means is that anyone working for a living in Great Britain who is not an employed earner is treated as self-employed. There is nothing to prevent an individual being both an employed earner and a self-employed earner at the same time for different activities.
An earner is defined as anyone who derives remuneration or profit from an employment and employment is any trade, business, profession or vocation.
For an individual to be an employed earner there has to be a contract of service, but such a contract can be written or oral and can be expressed or implied. Whether such a contract exists can only be determined following an examination of all the available evidence. The relationship which needs to be identified is one of master and servant, and where that exists as a matter of fact, it is irrelevant that the parties involved may have regarded it as something different.
Peculiarly where income is derived from a criminal activity, an illegal contract for service is implied. As the person engaging in the criminal activity is not deemed to be gainfully employed, they do not fall within the NIC provisions.
Threat from HMRC
HMRC are very likely to challenge matters where the stated or contractual position is inconsistent with the realities of an arrangement. An agreement between parties becomes important where there is real doubt as to whether an individual is employed or self-employed. In such circumstances what the individuals have agreed carries a lot of weight.
Where there is any doubt as to whether there is employment or self-employment, there are a number of tests to be applied. In applying these tests, the case law which has built up over many years needs to be taken into account.
How emTax can help
To help employers get their worker’s employment status correct, we are providing a free webinar on this subject on 15th November 2017. Click here to register your interest in attending.
We also recommend that employers start examining the actual terms and conditions of their engagements with off-payroll workers. Unfortunately, what is written into the contract for services is not as important as what happens in practice when it comes to determining a worker’s employment status.
Our consultants are ex-HMRC and also have extensive experience of working within the “Big 4” accountancy firms. We pride ourselves in being able to deliver “Big 4” quality employment tax advice at a fraction of their prices. We have devised a two stage process that will aid employers immensely in this matter. This comprises of: –
- A review of written self-employed and direct hire Personal Service Company contracts – It is essential to ensure that contracts are robust so that they clarify the basis of the engagement.
- A standard ‘Due Diligence’ approach for use when taking on suppliers – We would recommend a standard checklist is introduced as evidence that engager does undertake a thorough ‘due diligence’ approach before contracting with a new supplier.
Having an auditable process to decide whether or not someone should be on the payroll will safeguard employers when HMRC next visit.
We can also provide access to a dedicated online service where we can offer accurate IR35 reviews free of charge. Click here to find out more information.
Please do not hesitate to contact us for help on this or any other employment tax matter.