ESM0127 - Procedural aspects of status cases: hypothetical cases

HMRC are often asked to say whether they will treat a proposed contract as a contract of employment (Schedule E/employment income and Class 1) or as a contract for services (Schedule D/Trading Income/Class 2). Such requests present three main problems

• If you decide that the worker is an employee, the other side may return with a succession of fresh proposals. There is a risk that you will be drawn into a time-consuming attempt to get the worker classed as self-employed.
• Only one party to a proposed arrangement may ask for your opinion. But it takes two to make a contract and you may find later that the other person takes a different view about the facts.
• The terms of the proposed arrangement may not be the same as the reality when the work starts. It frequently happens that the parties fail to realise how their relationship will develop. For example, they may say that the work will not be subject to control but, in practice, the 'employer' keeps a tight grip on the way work is done.

In all these situations any time you spend on the proposed arrangements could be unproductive. Usually it is in marginal cases that the parties seek an advance opinion - cases where minor changes could easily alter the outcome. For this reason we do not undertake to comment in every hypothetical case. In no case do we undertake to give a firm opinion about the tax basis or NICs category before the worker has started.

When you can comment

Where you are satisfied that the parties genuinely need to find out in advance where they are likely to stand you may comment informally provided all the following conditions are satisfied

• The contract is in writing and either contains or is accompanied by sufficient detail to give you a reasonable understanding of what the job entails and how the worker is to go about it.
• The contract shows who is engaging the worker. Do not deal with contracts drawn up without a particular business in mind.
• The contract is for a new business or a type of worker new to the business. Do not give advice on cases where the employer proposes to change the status of existing employees. You can comment when the changes have been implemented.

Where you can comment and you consider the worker will probably be self- employed you should

• tell the enquirer your view in writing
• stress that your view is only provisional because no firm conclusion can be reached until it can be established how a contract operates in practice
• say that if the contract is not fully acted upon in practice or there are other oral or implied conditions which have not been presented to you, your view may alter
• say that if they implement the contract and want to be certain they have no obligation to account for PAYE tax and Class 1 NICs, they should contact you again.

Where you can comment and you consider the worker will probably be employed you should tell the enquirer your view in writing.

Do not be drawn into detailed discussion of your view which is, after all, only provisional. If there is any dispute or further proposals are made say that you cannot comment again until the work starts. Never suggest how the contract might be altered to achieve the desired status - the terms of engagement are a matter for the parties concerned taking into account the requirements of the business.

Advice given on this basis is in line with IR Code of Practice 10.

Records to keep and follow-up action

Make a permanent note so that you can trace the correspondence etc later. Where you feel it is appropriate make arrangements to check on the facts after a suitable interval - for example, if you doubt whether the written contract will be implemented as claimed or there are substantial numbers involved.