Contractors’ Questions: Is my employment status for rights separate to my status for tax purposes?
Contractor’s Question: Is it true that a person’s employment status in law is completely different to their income status in law?
And related, if I’m regarded as an employee by a company, how do I get HMRC to regard my income as company earnings rather than PAYE?
The background is that HMRC’s CEST tool says I am outside IR35, but the end-client engaging my services is demanding all contractors to be inside IR35 and to work through an umbrella company. It’s a blanket policy because there’s no Status Determination Statement, while all the while I am running my own business but now due to be taxed excessively. Please advise.
Expert’s Answer: The best way for me to answer this is to try to break your question down into two parts.
Firstly, let’s start with employment status.
Taxed like an employee with none of the rights
You are correct -- in so far as your employment status for employee rights purposes can indeed be different to your employment status for tax purposes.
So, while you might regard yourself as self-employed because you are running your own company, there are tax rules that require either you or your client to make an assessment for tax purposes.
What the IR35 rules mean, in practice
These rules, collectively referred to as IR35 have been around since 2000 and you will no doubt be aware that they were changed again last April, such that all but the smallest of clients must now assess their contractor’s employment status for tax.
If the employment status determination is ‘Inside IR35,’ the contractor’s income must be taxed as if they were an employee.
Unless an error has been made in reaching this determination, there is no mechanism to change the treatment of these earnings to company earnings.
CEST, outcomes, and umbrella companies
Secondly, let’s now turn to how you and your contractual partners are interpreting the rules.
You say that you, or someone on your behalf potentially, has conducted an employment status assessment using CEST, with the outcome that you are out of scope of the April 2021 off-payroll rules.
But based on the wording in your question, it sounds like your client has made a commercial decision not to engage contractors at all where they use limited companies, therefore leaving the structure of umbrella company as the only method of engagement.
If this is the case, there would be no requirement for the client to issue you with a Status Determination Statement, as umbrellas are outside the scope of the off-payroll working rules.
Unfortunately, there is very little you can do about this situation, other than to find a client who is more open to working with your limited company.
The expert was Chris Mattingly, chief executive of IR35 Navigator.