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Employment Status – Employed or Self Employed?

Posted by: edwinsmith on November 8th, 2010

Where there is doubt on the employed/self employed status of someone being paid by an employer then HMRC may attempt to reclassify the payee (worker) from self employed to employed.  If this were to happen, the employer must then account for tax and NIC on such payments. These situations can arise in businesses from PAYE audits being carried out by HMRC.

Remember the onus is on the employer to obtain the correct treatment of the workers engaged be they employed or self employed. An incorrect determination of a worker’s status (someone treated as self-employed when they should be employed) can lead to significant amounts of PAYE/NIC being paid by the employer going back several years. Penalties and interest could also be charged.

If employers are unsure of the status for any worker or wish to confirm the status before making any payments to a new worker then HMRC have an online tool named the Employment Indicator Status (ESI) tool which can be found at the following link HM Revenue & Customs:Employment Status Indicator (ESI). It is available for all employers to use although the tool was initially brought in to determine employment status for workers engaged in the construction industry where these issues are common.

The ESI tool will lead the employer through a series of questions in connection with the worker and although the tool does not as yet provide a legally binding result on a workers status in practice HMRC will normally accept the results provided by the tool. This will be dependent on reasonable answers being provided to the questions and the answers must be what happen in practice and not just theory.

It is important that the employer takes note of the ESI reference number and prints out the enquiry details in case a workers status is challenged by an HMRC officer. HMRC will only be bound by the ESI outcome if these copies can be produced.

Please contact us if you require any further advice in this area.

Filed under: PAYE, Tax