From HMRC’s perspective, those who are employed are generally easily dealt with by the taxation system. They are subject to tax and national insurance (NI) through the Pay As You Earn system. Those who are self employed are dealt with by the self assessment system and generally pay their tax and NI twice yearly, in arrears.
Many decisions over employment status have been hotly contested over the years, with HMRC generally arguing for employment status and the taxpayer arguing for self employment status. This is expected to continue with the introduction of the new Construction Industry Scheme (CIS) from 6 April 2007. There are potentially large penalties awaiting those contractors who do not establish the correct status of their subcontractors under this scheme.
In order to help contractors falling within the CIS decide on the status of the subcontractors they pay and also employees generally, HMRC have made an Employment Status Indicator (ESI) available on their website. The ESI can be accessed at www.hmrc.gov.uk/calcs/esi.htm
Those deciding to use the tool should do so with extreme care as it asks a series of leading questions which are used to form the basis for a conclusion of employed, self employed or unsure.
Where the tool is unable to come up with a conclusion it suggests the individual refers the particular circumstances to an HMRC Status Inspector. This could have all sorts of unexpected consequences, including a visit from HMRC.
HMRC also warn that the tool cannot be used to produce a binding ruling as to the status of a particular individual.
If you have any questions regarding the introduction of the new CIS or about establishing employment status generally we would be pleased to hear from you.