The growing challenges of "contractor" status

Even a casual observer of HR and employment law will have noticed recent Court cases about employment status: Uber; Deliveroo; Pimlico Plumbers.

Those cases have illustrated that the way in which companies engage workers has potentially significant consequences. Being an "employee" or a "worker" or a "contractor" gives different rights to the individual, and different obligations to both parties.

Press attention focused on the fight by these individuals to be recognised as "workers" or "employees", rather than as self-employed contractors, which is how they were treated by the organisations for which they worked.

But we should remember that there are also many thousands of individuals who wish to be regarded as self-employed.

One of the key consequences of status is tax. Self-employed means self-assessment when it comes to tax. The individual submits invoices to the company for their services and accepts responsibility for accounting to HMRC, at the end of the tax year, for any income tax and National Insurance contributions due.

Frequently,self-employed individuals incorporate their own personal service company - a corporate shell through which they sell their services to end-users. But HMRC guidance known as IR35 requires the individual to consider: "should I be deemed to be an employee of my client for tax purposes, notwithstanding that I contract through my company?"

As an employment lawyer, it's not an uncommon experience to be asked by a client "to make a contract IR35-proof". That's shorthand for – can you write a contract which will mean that I am not deemed by HMRC to be an employee of the end-user for the purposes of tax.

The simple answer is - it's not possible.

When it comes to determining whether a contractor is genuinely self-employed or whether they should be deemed to be an employee for tax purposes, HMRC will look at a range of factors: the degree of control which the client has; whether the contractor takes any financial risk; whether the contractor is liable for mistakes; whether the relationship is exclusive; whether the contractor can provide a substitute to provide the services if they are unavailable; etc.

Whilst the contractor's contract might include drafting which suggests a self-employment status, HMRC's focus is on what happens in reality. If the way in which the company treats the individual is more akin to employment status, it doesn't matter what is in the contract – HMRC will deem that individual to be an employee for tax purposes.

Currently, the obligation to undertake that assessment rests with the personal service company. But HMRC is currently consulting in relation to a proposal to change who is responsible for determining whether the contractor should be deemed to be an employee, and who is responsible for deducting the tax. If their proposals are implemented, it will become the end user's responsibility for undertaking the assessment of whether or not the individual should be deemed to be an employee.

Companies will need to understand how to undertake that assessment process, which will require time and resources. That will mean additional cost and a possibility that the day-rate previously enjoyed by the contractor may now be reduced by tax deductions prior to payment. If so, day-rate contracting may become a less popular way of engaging workers in the North Sea.

Euan Smith, partner, Pinsent Masons LLP

Euan Smith, partner, Pinsent Masons LLP