October 30th, 2012 / Insight posted in

Self-employed temp is a tax risk

SC writes: We are going to hire a temp on a fixed-term contract for three months at £2,000 a month. The guy has accepted our offer but has stated that he is self-employed, so I said we would hire him on that basis if that is true. Can we rely on his word or do I need to check his status first?

The rules for employment and self-employment are tricky and it is not as simple as someone claiming that they are self-employed, writes Jon Sutcliffe, partner at Kingston Smith LLP. It comes down to the facts and whether he is really an employee.

Employees are generally working just for you; you tell them how, where and when to work; you prescribe a set amount of hours to be worked and pay them a regular amount for doing so; and you pay them for overtime worked.

This is very different to the characteristics of being self-employed, and this puts much of the risk on the individual rather than on your business. Typically, the self-employed have financial risk; have several customers at the same time; decide how, when and where to work; can hire others to do their work; and use their own equipment to do the work.

The downside for you will come if you pay his invoice gross (as self-employed) and then HM Revenue & Customs (HMRC) says that he should have been employed, because it is your company’s responsibility to get it right. The payments you make to him would be treated as net payments after tax and HMRC would try to recover the missing PAYE and national insurance from your company.

This could land your company with an extra tax bill of more than £1,000 plus interest and penalties per month, so there is every reason to get it right from the outset. It’s always recommended to have a contract in place, but make sure it reflects the self-employment nature of the engagement.