Where arts organisations take on staff an essential first question is to determine whether these workers are employed or self-employed, writes Mahmood Reza.
This is called a ?status test?, and it will have a fundamental bearing on the way payments are made to the people who work for them. Payments to the self-employed can be made gross, whereas payments to employees have to be made under the rules of Pay As You Earn (PAYE). A worker?s contention that they are self-employed is not sufficient to discharge an employer?s responsibility; a status test must be carried out.
The essential characteristic of employment is a contract of service, and that of a self-employed worker is a contract for services. A contract of employment must contain an obligation on the part of the employee to provide their services personally, without such an obligation the contract is not one of service. The terms of the contract are not conclusive in determining status, and over the years a number of factors have evolved as indicative of contract for services, and therefore a pointer to self-employment.
Some of these factors include a right of substitution of personnel; the worker using their own money and taking financial risks; flexibility regarding working hours and place of work; the worker?s right to decline to perform certain work; a statement that the worker will be responsible for their own tax affairs; and the worker being responsible for rectifying work in their own time and at their own expense.
Each case or situation has to be judged on its own individual circumstances and merits. There is no formulaic approach available to determine whether a worker is employed or self-employed. Actors, ballet dancers, opera singers, musicians and other performers who appear live in the theatre, opera, ballet, or in clubs, or perform in film, video, radio or television productions, may be engaged under either contracts for services or contracts of employment. Where theatrical performers have independence from a regular paymaster this may indicate that individual contracts are not contracts of employment, even though the initial view based on the particular terms of the particular engagement may suggest otherwise. Accordingly, assessment of a performer?s earnings as self-employed will normally be appropriate. PAYE may be appropriate in circumstances in which a performer is engaged for a regular salary to perform in a series of different productions over a period of time, or in such roles as may be from time to time stipulated by the engager, with a minimum period of notice before termination of the contract. This would apply, for example, to permanent members of some orchestras and permanent members of an opera, ballet or theatre company. A designer, director or choreographer may be accepted as self-employed if they are engaged for a specific production that is for a limited period and they are paid a fee and a royalty. Otherwise they may be engaged as employees.
The cost to an organisation of getting it wrong is high. It will usually result in them being held liable for the income tax and National Insurance that should have been deducted, plus potential penalties and interest. The penalties can be as much as 100% of the tax and NI underpaid, extended to previous years.
The Inland Revenue has mounted an increasing challenge to self-employment, as evidenced by a growing body of case law. Compliance is the watchword that arts organisations, the unpaid tax collectors, need to be fully aware of.
Mahmood Reza is Proprietor of the accountancy practice Pro Active Accounting
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