Tax changes affecting self-employed contractors

From 6th April 2020, employers will be required to undertake an assessment of the employment status of self-employed contractors, and may be required to deduct employment tax at source.

What is the current position?

Under the IR35 legislation, if HMRC determine that an individual should be classed as an employee, HMRC can require payment of employment-related taxes from both the individual and the organisation they work for. What is changing is that the burden of undertaking that assessment is shifting to the person contracting with the self-employed individual, i.e. your school.

Who does this affect?

The change in legislation affects any individual who is self-employed and working through a “personal service company”, as well as individuals providing their services as a sole trader or via a partnership. There are a lot of different words to describe these types of relationships, commonly “contractor” and “consultant” for the individual, and “client” or “customer” for the school.

Schools of a certain size will need to comply with the obligations described below. There is an exemption for “small” organisations. For schools with a company structure, they will be “small” if they have turnover of less than £10.2m, have a balance sheet total of less than £5.1m, and have less than 50 employees. A small company does not need to file audited accounts. For all other organisational structures, including trusts, the exemption will apply if turnover is less than £10.2m.

If the school is not exempt, then they will need to undertake an assessment and may need to deduct employment tax.

What are the obligations on the school?

Where the school has a working relationship with someone who is self-employed, they will need to undertake a determination of employment status. This means that the school will need to work out whether, for tax purposes, the individual working with them should be treated as an employee. HMRC provides a useful online tool for undertaking the assessment which can be found here. HMRC have confirmed that, if completed accurately, they will be bound by the outcome produced by the online tool. Schools should therefore ensure they retain a copy of the online assessment.

If the outcome of the determination is that the individual should be treated as an employee for tax purposes, then the school will need to enrol them onto the payroll and deduct employment tax and National Insurance from the fee due to the individual. They will also be required to pay employer National Insurance and the apprenticeship levy.

It is important to note that just because an individual is treated as an employee for tax purposes it does not automatically mean that they are classed as an employee for employment law purposes. This is because there are slightly different legal tests for tax and employment rights.

How will this effect schools?

Obviously, the obligation to deduct tax adds to the cost of engaging self-employed contractors. Schools will need to be careful that, by deducting tax, they will not be in breach of contract for failing to pay the full gross amount to the contractor. Further failure to comply with the new rules when they come into force on 6th April 2020 may result in enforcement action from HMRC, including fines and penalties for non-compliance.

What can schools do to prepare for the change?

There is still a reasonable amount of time before the changes come into force, however, there is plenty to do now:

  • Review existing relationships with anyone who provides their services on a self-employed basis. If the working relationship is going to continue after 6 April 2020 then it is worthwhile undertaking the employment status assessment now. If that assessment confirms that the individual should be treated as an employee for tax purposes, the school will need to discuss this with the individual and put steps in place to ensure tax will be deducted. If the individual doesn’t agree with the school’s assessment, the school may need to consider giving notice to terminate the contract.
  • Review existing contracts to determine whether the individual’s fee should be renegotiated to adjust for the school’s tax liabilities, ensuring that the total cost to the school remains the same after employer tax liabilities are taken into account.
  • Look at existing contracts and precedents to make sure they give the school the contractual right to make deductions for tax.
  • Ensure that employment status assessments are undertaken and tax liabilities considered before entering into any new contracts with self-employed contractors.
  • Make sure that internal processes are updated to incorporate the new obligations to check employment status, that appropriate records are kept, and that relevant members of staff are aware of their duties.
Case study

A recent employment tribunal case concerning a visiting music teacher shows how difficult it can be to determine employment status, and how these are real issues affecting schools every day. 

The claimant undertook a variety of roles for the school, including visiting music teacher, working with ensembles, and other ad hoc work. At a preliminary hearing the employment tribunal was asked to determine whether she was an employee, a worker, or self-employed.

She had a written agreement with the school in which she was described as a self-employed contractor. The agreement provided that she was permitted to use the school’s facilities, that the school would introduce new pupils to her, and that the school would assist with timetabling. In return, the Claimant agreed to teach the pupils, be responsible for pupils’ wellbeing, to comply with the music department handbook, obtain payment from parents, and pay a fee to the school for the provision of facilities.

The school set the rate for lessons. It was the claimant’s responsibility to secure payment of invoices. The claimant took the financial risk if parents did not pay. She did not receive payment for holiday or sickness. She completed a tax return describing her work with the school as self-employed. The claimant arranged a substitute teacher if she was absent, with the substitute invoicing the parents directly. The claimant was obliged to ensure that any suitably qualified substitute was aware of their duties.

The claimant controlled the number of hours she worked with no obligation on the school to provide her with work, and no obligation on the claimant to accept work if it was offered. She taught privately in addition to her work with the school.

The judge noted that the case was “very near the dividing line”; he concluded that she was a worker for employment law purposes, but not an employee.

Key points in his decision were that substitution was authorised “when necessary”, which the judge found limited the claimant’s ability to send a substitute whenever she felt like it. Therefore, this indicated personal service was required. Further, the judge found that, due to the surrounding documentation, there was an implied term that any substitute required the prior approval of the school, even though approval was not always sought.

The judge also noted that the school’s literature referred to VMTs by name.

However, the judge also noted that the claimant had a direct relationship with parents, and took the financial risk. He also accepted that there was no mutuality of obligation and she could use the school’s premises for private teaching.

He concluded that the claimant was properly described as providing her services as part of the school’s business, rather than independently from it. Whilst she ran her own business, the way she operated it was different to the way she worked with the school. This meant that she was a worker, but not an employee. In consequence, she was entitled to benefits such as holiday pay.

Whilst this is a decision of an employment tribunal and therefore not determinative of how a similar case may be decided, it does give an indication of the balancing act required to determine employment status. It is also an employment law case, rather than a tax law case, but a tax tribunal will go through a similar test in reaching their decision.
This case also illustrates how individuals will challenge their employment status, even after many happy years of working. Schools are advised to consider their working arrangements with self-employed contractors carefully, and keep this under review as time passes.

If you would like to discuss the implications of the tax changes on your school, and ways in which you can prepare and protect the school, please contact Harriet Broughton.

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