Are you considered an employee or self-employed? : the tax rules

Last year, former BBC Look North presenter Christa Ackroyd found herself facing a £419,000 tax bill for work undertaken between 2008 and 2013.

Ackroyd believed she was a self-employed contractor, but HMRC argued she was an employee of Christa Ackroyd Media, her personal services company (PSC) and was thus liable for income tax and national insurance under IR35. HMRC was keen to stress that there was no suggestion either Ackroyd or the BBC had acted dishonestly or were trying to evade tax.

“She took professional advice in relation to the contractual arrangements with the BBC and she was encouraged by the BBC to contract through a personal service company,” the tribunal said at the hearing, whereas a BBC spokesperson said that using PSCs was “entirely legitimate and common practice across the industry”.

In Ackroyd’s words, “the contract issued by the BBC has now been deemed a contract of employment rather than freelance and is as such subject to different tax rules. That it has taken five years is an indication of the complexity of IR35 legislation regarding freelance broadcasters.”

How self-employed are you?

So, what went wrong – how can it be so unclear whether you are an employee or whether you are self-employed, when the engager, the supplier and even tribunals themselves seem uncertain? And what are the implications for accountants?

“This issue has arisen because of the confusion about whether you are ‘employed’ for tax purposes or not,” says Martin Brown, Director at PKF Francis Clark.

“A lot of people who are self-employed will set up their own PSC [personal service company]. Say I own a company 100% or partially with my spouse. That company then employs me, pays me a small salary, and sells my services in a consultancy capacity to the end user.”

Instead of the worker being paid directly, the end user is invoiced by the company and all profits made stay in that company. The key to this being tax efficient is that the company “pays tax at corporation tax rates after paying my salary. Instead of earning £50,000 a year in various different self-employed contracts, the £50,000 goes into the company. The company pays me a £10,000 salary and the remaining £40,000 is subject to corporation tax at 19%. After that, the profits can be saved up or paid out without tax so it’s a lower rate than if it comes into my own hands.” An alternative option would be “to pay out dividends to me, my spouse, or both.”

Increasingly, HMRC appears to be taking a dim view of this. “The increasing trend towards self-employment means that HMRC is losing out on tax and NI revenue, as the recent BBC example has demonstrated.” Whilst Ackroyd is the first high profile case to reach the headlines, “more than 100 BBC presenters […] have been handed a judgement following investigations by HM Revenue and Customs into their contractual arrangements with the corporation,” according to the Yorkshire Post.

This issue has arisen because of the confusion about whether you are ‘employed’ for tax purposes or not

What accountants need to know

What this means for accountants at the engaging company is to be sensitive to specific arrangements when engaging individuals via personal service companies. If you are an accountant to a supplier, be aware that there are some very intricate details in cases like this to bear in mind, as we will see below. Conversely, the good news from the engager’s point of view is that the onus is squarely on the supplier, not the engager, to ensure their tax status is correct. “In the Christina Ackroyd case, the liability lay with her company,” Brown says.

This is despite the fact that according to the presenter’s representation, the BBC had told her it wanted to work this way – it didn’t want to offer employment. Doesn’t that give the BBC some responsibility? “Yes,” says Brown. “But that’s not how liability works. It puts the BBC in a hard position – do we reimburse the individual – but the liability sits squarely with the supplier.”

If the BBC had first call on her services, would that present a further complication – that she might be regarded as a BBC employee for tax purposes, even if the BBC did not consider it a contract of employment? The tribunal decided that she was not “in business on her own account” and was “economically dependent” on the BBC, as it took up “almost all” of her working time according to ContractorUK, for periods between 2008 and 2013.

“If you look at self-employment from a tax point of view you quickly start to see how bewildering it is with all the different tax treatments and obligations,” observes Brown. “Where do you go for an answer? There isn’t one answer.”

Devil in the detail

Partly this is because the question of whether one is self-employed or not is subject to a number of different observations that carry different weight. For example – purpose and intention of the parties (someone is not necessarily self-employed just because the engager says they are); how much time you spend working for the engager (if they have a lot of control over your time, that might suggest you are an employee in all but name); whether or not you are based at the employer’s premises, or how much time you are spending on those premises; method of pay; whether the engager is exercising control over your activities (e.g. if they say you have to be working at certain times); and most importantly of all, whether the supplier is taking financial risk. “[Ackroyd] performed professional services but she did not profit from sound management of a business nor did she take any financial risk,” the tribunal’s judgment declared. All of these factors have to be weighed up and taken into account.

“So we don’t really know what the answer is still,” argues Brown. Ultimately, “there are a number of factors to decide whether you are employed or self-employed, and these are not clear-cut. The BBC case has shown there is debate about this. You can self-assess and pay more tax, or you can self-assess and treat yourself as a company and pay less tax, and HMRC need to challenge when there is uncertainty. And the results might not be as expected.”

It does seem that the self-employed are currently on HMRC’s radar, as the recent reversal of plans to scrap Class 2 NICs for self-employed workers suggests. This would have been a £150 a year saving for some 3 million workers, but despite stating he was “committed to abolishing Class 2 NICs to simplify the system” when the move was delayed last year, Chancellor Philip Hammond has now declared the plan permanently abandoned.

Whilst the official line is that this is to protect low-profit workers who would have to make increased pension contributions, perhaps it’s a sign of a wider concern about declining tax takes as more people take up self-employed, part-time and gig economy roles. It’s a trend that is likely to continue – and the effect on tax take will be closely observed.

Mark Blayney Stuart is Business Journalist of the Year, Wales Media Awards 2017 and Former Head of Research at the Chartered Institute of Marketing.