How contractors can avoid penalties on self-employed staff

Employers and employees risk invalidating their insurance and could have to cough up for unpaid tax and penalty fees if workers cannot justify their self-employed status.

Finding reliable, skilled staff remains a major problem among contractors and farmers, so many are turning to self-employed personnel to supplement their labour force.

It can be a great way to source staff on an ad hoc basis without the longer-term financial commitments of taking on an employee – such as pensions, National Insurance, paid holidays and benefits.

However, as more businesses across a range of industries have switched to using self-employed labour, HMRC has being taking a closer look at the reduction in its tax take and assessing how valid it is to define a worker as self-employed.

Critical to all discussions is the question of whether the worker in question can be legally and accurately be defined as self-employed, both for tax (and exemption from PAYE) and in terms of employment rights.

See also: HMRC targets self-employed workers in tax clampdown

Taxation

If HMRC decides a worker has been wrongly categorised then both the employer and the employee may have to pay additional tax and penalties or lose entitlement to benefits, so it is important that there is clear evidence on both sides to support self-employed status.

From a taxation point of view, the best place to start is HMRC’s IR35 – a piece of legislation that defines self-employment and allows HMRC to collect additional payment where a contractor is an employee in all but name.

Currently in the private sector it is down to employees to define their employment status but from April 2020 employers will be required to make these decisions if they have an annual turnover of more than £10.2 million.

Clearly this won’t affect all agricultural businesses, but it is important to note that HMRC is taking more interest in self-employed status.

The Government online checker, Check Employment Status (CEST) is a useful tool, designed by HMRC to help decide if a worker is employed or self-employed.

However, an individual is probably self-employed and exempt from PAYE if:

  • They are in business for themselves, are responsible for the success or failure of their business and can make a loss or a profit.
  • They can decide what work they do and when, where or how to do it.
  • They can hire someone else to do the work.
  • They are responsible for fixing any unsatisfactory work in their own time.
  • Their employer agrees a fixed price for their work – it doesn’t depend on how long the job takes to finish. They also invoice for the work done.
  • They use their own money to buy business assets, cover running costs, and provide tools and equipment for their work.
  • They work for more than one client.

If, for example, you employ someone with their own tractor and who is responsible for their own workload, including carrying out other contracting services for other farmers, then they would be deemed to be self-employed.

However, if you employ a worker who works only for you, on a regular basis, using all your kit and under your instruction, then questions are likely to be asked.

Employment Rights

If you take on a self-employed person then such rights as holiday and sick pay are not applicable. But to guard against future claims, you must be certain of their employment status.

A legal exemption from PAYE (see above) is a good starting point and they are likely to be self-employed if:

  • They are responsible for paying their own National Insurance and tax.
  • They don’t get holiday or sick pay when they’re not working.
  • They submit quotes to get work.
  • They are not under direct supervision when working.
  • They submit invoices.
  • They operate under a contract.

Safety Management

In terms of safety management there should be no difference between how you treat a self-employed or employed person.

David Knowles

David Knowles

“If a farmer employs a self-employed contractor and something goes wrong then it is incumbent on the farmer to have employed a competent contractor,” says NAAC safety management adviser David Knowles.

“Competence for a contractor could be demonstrated through membership of a professional trade body, such as the NAAC and/or appropriate training and certification.

Or, to go a step further, accreditation by a recognised organisation, such as the NAAC’s Assured Land-Based Contractor (ALBC) scheme.

“Likewise, if a contractor employs a self-employed sub-worker, they must also ensure that person is suitably competent for the job, established through qualifications, in-house training and assessment/monitoring.

“You must make a record as proof that you have taken all appropriate steps to assess competency and their work must be monitored on an on-going basis.”

In turn, it is vital for the farmer or contractor to supply the worker with safety information relevant to the work to be undertaken: for example, details of any overhead power lines, underground utilities, asbestos, and children or visitors who might be in the work area.

To be truly self-employed the worker must also provide all their own personal protective equipment.

Insurance

All self-employed workers should carry public liability insurance, which needs to be confirmed before any work begins.

In practice, the employer engages the self-employed contractor to act on their behalf and so takes responsibility as the principal.

However, if the contractor has an “indemnity to principal” clause in their insurance, then the contractor’s or worker’s insurance will cover any claims. This is worth checking.

James Moss

James Moss

James Moss, account executive at Jelf Insurance, says: “It is vital that any self-employed worker has public liability insurance, and that their public liability indemnity limit should match that of the employer.”

“Anyone looking to undertake contracting in any form must make certain that they have appropriate specialised insurance. This particularly applies to any diversified farmers who may think they are covered by their farm policy – most need a separate contractor’s policy, which will provide specialist extensions to cover work on someone else’s land.”

It is also vital that all workers are properly categorised because insurance could be invalidated if they are self-employed in name but do not meet the criteria.

Key messages

Check the status of any self-employed worker:

  • In tax law and to decide if they are legally exempt from PAYE
  • In employment law and whether they have employment rights
  • Through common sense – to make sure you are looking after the safety and welfare of staff, whatever their status.