Need to Know

Q I’m constantly coming across freelance arts jobs which I think are really ‘employed’, and would be seen as such by the tax man. For instance, the employer wanting someone to work from their offices and during their opening hours, with a definite starting and finishing date. I don’t want to be difficult, but I think this is taking the mickey. How can I find out? And would I be legally liable in any way if I took a job which was then found to be ‘employed’ rather than freelance?

A This is an all too familiar situation. The starting point in determining whether you are employed is to look at the nature of the relationship. This is not what is contained in the employment agreement but the degree of control that the employer exerts over the worker. If the essence of the relationship is that the employer determines where, when and how the work is undertaken then the worker is likely to be an employee. If the worker’s obligation is to be at a place of work and do whatever the employer requests within a particular job description then the employer is determining what the worker does. On the other hand, if the employer hires a worker to write a report and gives the worker a brief and deadline, but does not otherwise specify the content of the report, or how or when the work must be done, then that is a classic contract for services between a party and a self-employed contractor.
If it is an employment relationship then the employee will be taxed under Schedule E, and that will usually mean that tax will be deducted by the employer under PAYE. It is the employer’s responsibility to make the deduction if PAYE applies. If the relationship is a contract for services the worker will be under Schedule D and the employer will be under no obligation to deduct tax. The issues largely affect the employer; if the employer wrongly treats you as a freelance and therefore does not deduct tax, HMRC may look to the employer for the tax on the basis that the fee paid to you was made after tax. In certain circumstances the employer can look to you to reclaim any tax claimed by HMRC but that depends on interpreting the agreement between you.
The other important issue is national insurance (NI). Schedule 1 NI applies for employees and schedules 2 and 4 apply for self-employed workers. There are higher rates of NI for schedule 1 (both the sums paid by the employer and the worker) than apply for a contract for services. This is one of the main reasons employers seek to present jobs as freelance engagements. However, if the classification is incorrect then the employer will be responsible for the higher rate of national insurance and potentially the employee will be responsible for a higher rate of employee national insurance. Although in general terms employee national insurance tends to apply to persons treated as employees, for the purposes of employment law this is not always the case. It is worth taking specific advice as the NI rules can be complicated