Employment status is the process of deciding whether someone is employed or self employed.
Its always been an area of potential confusion, and there have been a few confusing social media posts in recent months from Yoga Teachers who have been told they must become limited companies in order to keep teaching in schools, universities or other public sector entities. This is categorically not the case, and it stems from misunderstanding by management of the schools etc.
Anyway, lets look at the whole area in detail.
- Employment Status – whether an individual is employed or self employed.
- Status Tests – the tests behind this decision.
- Sole Trader – an individual who is self employed
- Personal Service Company (PSC) – a company which predominantly provides the services of one individual – that person would normally be the director / shareholder. They are an employee of the PSC and are not classed as self employed. There is no statutory definition of a PSC, and the usage is colloquial.
- Direct Employee – someone who is employed by the engager.
- Engager – the organisation that work is done for. May or may not be the employer (won’t be if its a Contract for Services).
- Contract of Service – an employment contract, between employer and employee.
- Contract for Services – a contract between a sole trader or company and an engager, for the provision of services on a self employed basis.
- Employer – the organisation employing a direct employee – will also be the engager.
- Umbrella Company – a company that acts as an employer for temporary, contract or freelance workers where the engager will not accept them as direct employees, but the status tests indicate employment.
- IR35 – Employment Intermediaries Rules – a set of rules importing status tests into the relationship between a PSC and its director / shareholder.
- Engagement – a contract, be it employed (Contract of Service) or self employed (Contract for Services)
With all these definitions, is it any wonder there is confusion!
Employment Status is the process of deciding whether someone is employed or self employed, and hinges around the Status Tests.
The Status Tests are largely derived from case law and the most significant case in terms of laying down the rules was Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance 1968. The most recent legislation around Employment Status tests was arguably the introduction of PAYE in 1944.
Note these dates, there has been little change for many years. There have been further cases but they have clarified the law in particular circumstances rather than changing anything.
There are three Status Tests:
- Personal Service Obligation – the individual must be obliged by contract (written or established by practice) to work personally – if you are responsible for finding your own cover teachers then its a strong pointer you are self employed.
- Control – there must be a level of control over not only what is done, but how it is done – so for a Yoga Teacher the engager would probably need to be setting the content of your classes and vetting the lesson plans for this to occur.
- Mutuality of Obligations – the engager must by contract or practice be obliged to offer work, and the individual to accept it. This is unlikely to be the case if you teach a handful of classes a week in a school or similar, however if you spend substantially the whole of your working week teaching at a leisure centre or studio, then it may be relevant. Even then of relevance to mutual obligations would be consideration of what happens if classes are empty, who “owns” the students, ability to teach elsewhere and a number of other variables. In short its unlikely mutuality of obligation will apply unless you are near to full time somewhere and to all intents and purposes an employee.
For an engagement to be employment all three of these tests must be positive – i.e. there must be a Personal Service Obligation, Detailed Control, and Mutual Obligations – if any one of these three tests is not present then the engagement must be one of self employment.
Sole Traders and Individuals
Where an individual has a contract with an engager, be it a formal agreement, exchange of messages or verbal, then the obligation falls on the engager to assess Employment Status. If the status is employment then the engager must deduct tax/NI under PAYE. If the status is self employment then the individual is classed as a sole trader and paid gross – they must register as self employed with HMRC.
These rules apply regardless of whether the engager is a private or public sector entity, or indeed a charity or private household. In the latter case, private households don’t generally engage a yoga teacher on terms that create any uncertainty around self employment, but it could be a different case with, say, a nanny or similar, and in that case even a private household is obliged to stop tax/NI under PAYE.
To recap these rules haven’t changed in several decades and they apply to an individual working for a school or similar. Unless the Employment Status tests are all positive, the engagement is one of self employment, and there are no other obligations on the engager.
Personal Service Companies and IR35
Here is where it gets more complex, and there have been some recent changes.
PSCs became popular in the 1980s onwards for two reasons. Firstly, the Employment Status tests don’t work well in situations of long term contracts, e.g. an interim manager’s post, a consultant project manager, IT contractor taking on a six month contract – anything where the term freelancer or contractor may be used colloquially – using a company took the risk out of the situation and guaranteed self employment status, albeit via a company, not as a sole trader. Allied to this, employment agencies were not, and are not, allowed to pay an individual on a self employed basis, so the choices became a) becoming an employee of the employment agency on PAYE, or b) operating through a PSC. Secondly, for higher earners, operating through a PSC was increasingly more tax efficient than working as a sole trader.
By the late 1990s there were concerns that PSCs were being abused, so the IR35 rules were introduced from 1999. They work by importing the existing Employment Status tests into the PSC working arrangements. However the engager wasn’t involved. The IR35 rules require the individual to consider whether, in the absence of the PSC, and hence assuming the individual was contracting as an individual, the arrangements would be employment or self employment using the Status Tests – this is referred to as the “Hypothetical Contract”. If self employment, then the individual carries on using their PSC unfettered. However if employment, then the individual, via the PSC, has to pay tax as broadly if they were an employee of the engager.
IR35 thus left the position unchanged for engagers, but changed things for individuals working through PSCs.
Public Sector IR35
IR35, having been in place since 1999, hasn’t been one of the most successful or easy to work with pieces of tax law.
From April 2017 IR35 was reformed for situations where the engager is a Public Sector Body (PSB – that’s one who is subject to Freedom of Information Act rules). With the reformed Public Sector IR35 the engager has to operate the Status Tests on the Hypothetical Contract, and if the results are that the engagement, if direct, would be employment, then the PSB has to treat the individual as an employee for PAYE purposes and stop tax/NI from the payment to the PSC. If the result is self employment, then nothing changes and the individual is paid gross via the PSC with no special rules.
Just quickly with touching on these, as they are subject to many misunderstandings. An Umbrella company is a payroll management company in place between an engager or employment agency, and an individual, and broadly are an alternative to a PSC. Tax wise, regardless of Status Tests they treat the individual as an employee, and so for anyone not deemed employed under the Employment Status Tests they are not usually tax efficient, however they may cut administration time.
Categorically, Umbrella Companies are not a tax dodge, no matter what the media may report or politicians say.
A practical summary for Yoga Teachers
The above simplifies a lot of complex issues. However the salient points are:
- Employment Status Rules haven’t changed since 1960s
- There are no new rules affecting individuals working as sole traders regardless of whether they are working for a) a private entity, e.g. a private gym, b) a Public Sector Body, e.g. a school, or c) a third sector organisation.
- No one working as a sole trader is forced under any tax rules, new or old, to become a PSC or use an umbrella company.
- The only recent changes affect individuals working through a PSC for a Public Sector Body where the Employment Status Tests indicate employment – now the PSB is obliged to treat the individual as an employee for PAYE purposes. Remember the Employment Status Tests require all three conditions of control, personal service and mutual obligations to be met, which is extremely unlikely for most peripatetic Yoga Teachers.
- A trading name and a business structure doesn’t create a PSC. So a sole trader with a trading name for example, isn’t a PSC. A PSC must be a limited company, controlled by the individual whose services it provides.
Final summary – There are no new requirements for an established sole trader Yoga Teacher working in schools, or other parts of the public sector, to make any changes. If someone is saying you must then they have misread the rules.