Established thinking says that if you hire a consultant it means they are self-employed. So you do not have to worry about their tax or national insurance, and they’re not entitled to the same rights as your other workers.
However, times are changing for consultants and the people who employ them. Consideration now has to be given as to whether a consultant really is a consultant or an employee. With this comes tax tax implications .
The government is expanding the off-payroll working rules known as IR35 to the private sector. This means that self-employed workers tax bills are likely to increase for many from 2020 onwards.
What should you expect as a self-employed contractor in the private sector for 2020?
Businesses should now expect the recent rule changes in the public sector to apply to the private sector too. Wide spread non-compliance is said to exist in the private sector, meaning people are incorrectly paying the ‘self-employed’ tax rate when they are actually employed. IR35 is designed to combat this type of tax avoidance.
Consequences of getting this wrong:
- Financial penalties – if the agency or hirer involved doesn’t deduct the right amount of tax before paying the worker, they could be liable for the unpaid tax and NIC payments.
- Competition – there is a risk that contractors will only want to work for firms that understand these rules and have taken steps to ensure compliance.
- Increased costs – if workers fall ‘inside’ IR35 they may increase their rates as they will be paying more tax. This can reduce their income by up to 25%!
When is a self-employed consultant actually an employee?
The lines continue to blur between who is an employee and who isn’t. This is due to the “gig” economy constantly expanding. However, only the tribunal has the power to decide this.
The main factors that are taken into account when deciding whether someone is an employee or consultant are:
- Personal service
A ‘master’ and ‘servant’ relationship is one that exists between an employer and employee. However, someone who is self employed will run their own business and serve the client or customer rather than the employer.
This includes who decides the tasks to be completed, the way in which they shall be done, the time taken, and where they will be done. Does one party have control over the other? If so there’s a ‘master’ and ‘servant’ relationship.
Other things that need to be taken into account include:
- Whether there is an obligation to provide work and;
- The length of the contract and benefits offered.
What are the consequences of a consultant being deemed to be an employee?
- Claims from consultants that they are due holiday pay, national minimum wage, or if engagement has lasted for more than two years claims for unfair dismissal or redundancy.
- If a self-employed consultant is in fact an employee, HMRC will look to the hiring organisation rather than the consultant for back tax and payment of penalties.
What to consider if you are planning to be hired on a consultancy basis
Are you actually a consultant or deemed to be an employee?
Factors that may mean you are deemed to be an employee include:
- The length of your contract – if this is a long period this may indicate you are an employee
- Whether you are in control of your own work and business – do you have to answer to the person hiring you or can you make decisions on yourself?
- Is this a one off job or does the company have an obligation to provide work to you?
Bigger companies are likely to want you to go on their pay roll to avoid them getting presented with a large tax bill later down the line. As a consultants you will need to make a decision about whether you are happy to pay more tax or turning down the work completely.
What should you consider if you are planning to hire a consultant?
That you have not actually hired an employee!
Take into account:
- Allowing the consultant to have a degree of control over when, how and the times they work
- Avoid using the same consultant for a an indefinite period without breaks
- Allowing the consultant to use their own equipment
- Making sure to not pay the consultant when they are off sick or on holiday
- Regularly review your arrangement.
So… how can insurance help with this?
Employment dispute insurance may be able to help you if you are faced with a claim from a contractor who is actually an employee.
Legal expenses could provide protection if there is an investigation against you by HMRC. This will typically pay for the accountancy costs in fielding an inquiry by the tax man (or woman!)
Additionally if you have PI in place this may offer protection where your ‘consultant’ makes a mistake resulting in a claim.
Although times may be changing for consultants this is not something to be afraid of. Having the correct insurance in place provides protection if one of the situations above were to arise. It will also keep your mind at ease as the ever-changing definition of an employee is hard to keep up with!
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