This Content Was Last Updated on April 5, 2023 by Jessica Garbett
Overview for Sole Traders
The issue of employment status comes up some time – are you employed or self employed?
This is most likely, for a yoga teacher, to arise if you are working in a gym or studio and clients are provided for you.
Our parent Whitefield Tax has a comprehensive Guide to Employment Status explains which more.
In brief, there is a fundamental distinction in employment and tax law between being:
- Self employed – as a Sole Trader or Partner in a business
- Employed – working for someone else – sometimes known as being “on the payroll”
Confusingly Company Directors are regarded as Employees of their Company, although they and people around them would probably regard them as Self Employed.
For some aspects of Employment Law there is a half way house called “Worker” (sometimes Limb B worker, Contingent Worker or Dependant Contractor), with rights stemming from The Working Time Directive and other EC law enacted in the UK. It’s an esoteric and complex area, but thankfully one which doesn’t come up often. “Workers” are Self Employed but have some Employment rights.
Generally the Employed v Self Employed issue arises for Yoga Teachers in two sets of circumstances
- Working for gyms and large studios – legally whether you are Employed or Self Employed depends on tests like how you work and are paid, however some local authorities, gyms and studios have blanket policies about payrolling teachers – its likely such policies are incorrect, but its not common for them to be challenged.
- Engaging help and assistance yourself – an occasional cover teacher isn’t an issue here, we are referring to more substantive and long term arrangements, eg hiring administrative help or another teacher to teach a class regularly
For an employment relationship to exist there must be three things:
- Personal Service Obligation – the individual must be obliged by contract (written or established by practice) to work personally – if you work in a gym, studio, or similar, and are responsible for finding your own cover teachers then this is a strong pointer you are Self Employed.
- Control – there must be a detailed level of control over not only what is done, but how it is done. It is stressed the level of control is important – and cursory control is not sufficient to meet this test.
- Mutuality of Obligations – the Employer must by contract or practice be obliged to offer work, and the Employee to accept it.
If any one of these three conditions isn’t met then the relationship is one of Engager and Self Employed – invoices should be paid gross. If they are all met then its an Employer and Employee relationship and money paid needs to subject to Tax and NI under PAYE (payroll).
What Difference Does It Make?
- Deductibility of expenses – Self Employed can deduct expenses, whereas in most cases the Employed cannot
- Eligibility for sickness benefits – Employees are entitled to these, Self Employed are not (although some State Benefits cover this instead)
- Eligibility for employment protection – eg unfair dismissal rights for Employees – some rights may apply to everyone, eg anti discrimination
- Stability – an Employment is considered more reliable that a Self Employment and may make things like loans and mortgages easier to obtain
- NI costs – Employers have to pay Employees NI on top of gross salary amounts for Employees
- PAYE – employees must have tax and Employees NI deducted at source
In Practice for Yoga Businesses
- Cover teachers – these are likely to be Self Employed as there is unlikely to be control or mutual obligation
- Hiring a teacher to work in a Yoga Studio you own – probably Self Employed, as control will be weak – you will tell them what to do, eg “teach a restorative class” but not how to do it, eg what asanas or pranayamas to use
- Management, Administration or Reception staff – probably Employed, as more detailed control will exist, eg working with your procedures. Its likely that mutual obligations and personal service will be implied in the role – probably Employed, again as there is detailed control, eg working with your procedures. Its likely that mutual obligations and personal service will be implied in the role
- Task based assistance, eg updating website or social media – likely to depend on the detail
IR35 – Also called Intermediaries Legislation
You may hear of rules called IR35 mentioned in this context.
IR35 never applies to Sole Traders and very rarely to Partnerships (there is a theoretical possibility re partnerships, but in over 20 years we’ve not seen it in practice)
IR35 applies to small limited companies where typically:
- All the work is done for one main customer – if the work is done for a number of customers, its unlikely to apply
- Where there is a director / shareholder who does most / all of the work
- These companies are informally known as “Personal Service Companies” (PSCs) – although that term has no status at law
In most instances of teaching Yoga, IR35 will not be relevant as the Employment Status Tests are unlikely to be met; Yoga Teachers should take advice if it is suggested IR35 applies to their work.
History of IR35:
- Historically if there was any doubt about employment status, one way to make this certain was for the Sole Trader to become a limited company (known as a “Personal Service Company” – “PSC”) – so the relationship with the Engager was one one of Company to Engager, rather than Sole Trader to Engager – and a Company couldn’t be an Employee.
- IR35 countered this, from 1999, by ensuring that the Employment Status Rules – set out above – still apply in Limited Company situations.
- IR35 operates on the Hypothetical contract between the Individual working though the PSC and the End Client – this involving constructing the Hypothetical Contract that would exist if the PSC and any other Intermediary wasn’t in place.
- If the terms of this hypothetical contract indicated employment status, using the status tests outlined above, then the PSC was required to pay a salary to the Worker of at least 95% of the income under the engagement – this negates most of the tax benefits of working through a company, eg use of dividends or spousal tax allowances.
- There is a default procedure with quite complex tax adjustments if that 95% salary isn’t paid.
- Historically responsibility for assessing IR35 and operating it laid with the PSC and the Worker (normally the Worker would be Director / Shareholder of the PSC so effectively one and the same), but in recent years its moved to the engager.
This is an outline of IR35 – our parent, Whitefield Tax, is probably the most experienced accountancy firm in the UK on IR35 having lived and breathed it since 1999 – Read Our Guide to IR35 on Whitefield’s Website.
- From April 2017 reverse IR35 operates for engagements with Public Sector Engagers – the Engager has to make the IR35 assessment and deduct tax and NI from the payment to the PSC
- From April 2022 the same rules operate in the Private Sector, unless the Engager is a small company, which broadly means two of
- Turnover of no more than £10.2 million
- Balance sheet total of no more than £5.1 million
- Number of employees of no more than 50
Unfortunately when the April 2017 Public Sector IR35 reforms came in a number of Engagers incorrectly tried to apply them to Sole Traders, and often Sole Trader Yoga Teachers working for Hospitals, Local Authorities or Schools were being told they must become Limited Companies – there is basis in tax or general law for this, it seemed to stem from misunderstandings, caution, and lack of understanding by Engagers.
Here is our commentary at the time, which still holds good – Employment Status and Yoga Teachers – Whats Changed, What Hasn’t changed and Why You Don’t Need a Company to Teach Yoga in a School
IR35 summary – remember this only applies to Companies:
|Small Private Sector Engagers after April 2021||Public Sector Contracts and non Small Private Sector Engagers|
|Responsibility for Status Decisions||PSC||Engager|
|Responsibility for making deductions on contracts inside IR35||PSC||Person paying the PSC – Agent, or Engager if no agent|
|Tax and Employees NI borne by||PSC||PSC|
|Employers NI borne by||PSC||Person paying the PSC – Agent, or Engager if no agent.|
|5% expense deduction||Allowed||Not Allowed|
|Tax risk if IR35 reviewed by HMRC||PSC||Engager (but be aware of tax clawback clauses in contracts)|
|SSP/SMP and similar||PSC||PSC|