• 
• 
• 
• 

Employment Status

Autumn 2006 Taking Account

An employer who wrongly treats a worker as self-employed is liable to pay over to HM Revenue & Customs (HMRC) the income tax and national insurance that would have arisen under PAYE.

In practice, HMRC has often only collected the employer's and employee's NIC. They have usually accepted that the individual's self-employed income tax covers the employer's PAYE liability.

This practice has changed. HMRC will now demand the full income tax from the employer. One reason is that the self-employed tax is likely to be lower than the PAYE tax because fewer expenses are normally allowed against employment income.

More importantly, an individual who has been reclassified as an employee can claim a tax repayment, on the grounds that the assessment on a self-employed basis was incorrect. HMRC will agree to offset an individual's self-employed tax against their employer's liability if the employer can obtain an irrevocable written undertaking from the worker. This should state that the individual will not seek a refund of the tax and requests HMRC to apply the tax paid against the PAYE liabilities of the employer.

If you are concerned that workers might be reclassified as employees, you could consider obtaining such a mandate in advance. We can help you with this, as well as advise you on the correct status of workers and deal with any HMRC enquiries.