Back to basics: a new working arrangement for self-employment?

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By Chis Cunnane, TPS Tax Subject Controller

6 May 2019

The issue of modern working practices continues to hit the headlines. The recent “self-employed plus” agreement for Hermes couriers has again focused attention on whether an individual is employed or self-employed. Here we go back to basics on the issues considered by HMRC when deciding whether an individual is an employee.

On 4 February 2019 an agreement between the GMB Union and Hermes was announced, offering Hermes self-employed courier drivers a new way of working.

Dubbed “self-employed plus”, couriers are guaranteed a minimum level of pay across the year at a rate above the national minimum wage, and 28 days holiday.

Hermes couriers can choose to sign the GMB / Hermes agreement, effectively giving up some earnings in return for fixing a minimum level of pay across the year. Alternatively, they can continue to be paid per parcel delivered which is generally at a higher hourly rate.

How will HMRC view this arrangement?

Background on the gig economy and self-employment

The gig economy allows workers to benefit from flexible hours, with control over how much time they work. The flexible nature offers benefits to employers, as they only pay when the work is available, and don't incur staff costs when the demand is not there.

As workers in the gig economy are often classed as independent contractors, there is very little workplace protection. Independent contractors do not have employment rights such as sickness pay.

Workers have limited employment rights including holiday pay, paid rest breaks and the national minimum wage.

Hermes is one of a series of employment tribunal hearings which have considered whether employers are correct in classifying staff as independent contractors.

Employment law distinguishes between employees, self-employed individuals and workers. Employees have protection against unfair dismissal, a right to receive redundancy payments, right to the national minimum wage, paid holiday and sickness pay.

Self-employed individuals have none of these rights. Workers have limited employment rights including holiday pay, paid rest breaks and the national minimum wage.

In June 2018 there was a landmark legal case in which the Supreme Court held that a plumber, VAT-registered and paying tax as a self-employed contractor, was a ‘worker’ for Pimlico Plumbers and therefore entitled to limited employment rights.

The differences between tax and employment law

From a tax perspective, the distinction is currently still only between employees and self-employed individuals.

Only employees will be assessed to tax under employment income. Self-employed individuals will be assessed under the trading income rules.

It is often advantageous from a tax perspective for an individual to show themselves to be self-employed rather than employed, as more expenses are deductible from trading income and the NIC burden is generally lower.

For a business, contracting with self-employed individuals rather than hiring employees saves employer's NIC at 13.8%.

The following issues are often considered by HMRC when deciding whether an individual is an employee:


Employment

Self-employment

Control over the manner of performing the work

Freedom to achieve the objective

Perform the work personally

Able to delegate duties to another

Remuneration without risk

Bears losses but keeps profit

Employer provides tools

Provides own tools and equipment

Regular hours defined

Freedom to decide when and where to do the work

Expectation of future work and employers obliged to find this

No expectation of recurrence or obligation

Payment during illness or holiday

Make own arrangements (insurance)

Payment while in employment even if no risk

Payment dependent on completion of task and can be withheld until task completed satisfactory


The points in the table are not conclusive. Each point should be considered with the others.

In the Hermes case, the Employment Tribunal summary did not dispute that the couriers were ‘self-employed’.

This was despite the arrangements demonstrating expectation of future work. Whilst the contract terms allowed the delegation of work to another courier, these were in substance controlled by Hermes, so that it was rare for this to happen.

The Tribunal did not analyse why the contract was not one of employment. Relevant factors could have included the fact that the couriers had to use and maintain their own vehicles to deliver parcels and deal with their own tax and national insurance.

The couriers were also free to work for competitors at the same time as working for Hermes.

What can be expected from HMRC?

Hermes has stated that the agreement remains a self-employed arrangement for tax purposes.

It is likely that HMRC will re-examine these types of agreements to establish whether what was previously treated as a self-employed arrangement has now become an employed relationship for tax.

The implication for businesses would be extra national insurance, pensions, and potentially apprenticeship levy costs.

In addition, payments to these individuals will come within the scope of real time reporting and the associated PAYE/NIC regulations.

There will also be financial penalties for non-compliance. Individuals may also be left with higher national insurance costs if reclassified from self-employed to employed status.

The government consultation following the Taylor Review is committed to bringing forward proposals for how employment rights and tax frameworks could be aligned.

These have yet to be published, but further agreements similar to the one between Hermes and the GMB may well prompt the issue sooner rather than later.

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