How to determine an individual’s employment tax status – and legal rights

13 January 2020

This article was updated on 31 July 2020 to reflect confirmation that IR35 rule changes will take effect from April 2021.

In its guidance on determining an individual's deemed employment tax status, HMRC lists three key factors:

1) Personal service

In order for the engaged person to be an employee for tax or working rights purposes, they must be obliged to provide their services personally. For many cases, the right to provide a substitute to do the work or the absence of that right can be an important factor and has been the determinant in some employment legal rights cases.

2) Mutuality of obligation

As a minimum, an employment relationship must contain an obligation for the engaged individual to provide his or her work or skill and an obligation for the engager to pay that individual for that service. Employment legal rights assessments also see this contractual mutuality as a critical factor although it is less helpful in separating out the legal rights employee status from that of the legal rights worker status, since it may often be present in both.

3) Right of control

To be a deemed employee for IR35 purposes or an actual employee or worker for an employment legal rights assessment, the engaged individual must be subject to a certain degree of control by the engager. This control may relate to how an engaged individual performs their services, what tasks have to be performed, and when and where they must be performed. HMRC considers for deemed employee tax status that it is the right of control that matters but employment legal rights judges also look for actual control rather than a paper right.

Two parallel bodies of (mostly) non-binding case law have grown up over the last 40 years or so as to employment status, one in the tax tribunal system and another in the employment tribunals.

The tax assessment of deemed employee status has had support from the Check Employment Status for Tax tool (CEST) for several years, which is now being updated by HMRC. But employment legal rights assessors have had to navigate a considerable body of cases developing industry by industry.

Under the Good Work Plan, the Government has promised to introduce greater transparency in employment legal rights. A new online assessment tool was promised for April 2020, but has yet to appear. Will this be the CEST tool or a re-worked version of it? And what will the status of its assessment product be in law?

The post new IR35 workforce solution should not be designed in tax isolation.

For end users to properly manage their risks, the employment legal rights already in existence and likely to be created or transferred must be assessed and managed effectively alongside the tax aspect.

Key questions

  • What’s the employment legal rights status of any engaged individual working in your business via a personal service company (PSC) intermediary?
  • Is an engaged individual an employee of their PSC?
  • What’s the impact for employment legal rights purposes of deemed employee status determinations?
  • What employment legal rights risks are there by ending your agreement with a PSC?
  • Are you free to make a new direct agreement with an engaged individual or do they already have employment legal protections?
  • How can you manage any existing employment legal rights on an IR35 workforce restructuring?

Contact Carolyn Brown for expert advice on answering these questions.

Understanding the contractual relationship between individual and end user client

In the next article, Carolyn talks about the contractual relationship between individual and end user client.

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