Limited company vs sole trader
It is important to get this right guys. We hear from Daniel Prais of Crawford Accountants who advises on 12 important tests you should consider...
On 6 October 2011 I described in two separate articles the potential benefits of being self-employed but also the dangers and costs of misunderstanding your status.
This area has been a hot topic for some time, in particular for H M Revenue & Customs who appreciate the loss of revenue to themselves from misinterpretation and the penalties to taxpayers. The losses to HMRC can be compounded where the misinterpretation is combined with individuals operating through their own limited company. H M Revenue & Customs have had their own general guidance for some time on how people can identify if they are truly self-employed or not but they have recently revisited this and issued guidance on their approach to considering whether or not to check taxpayers compliance. This guidance is aimed at people working through their own limited companies but the same rules will actually apply to considering whether a self-employed locum/consultant is actually an employee.
It must be appreciated that the guidance H M Revenue & Customs have issued is not law, however it is very useful to know HMRC’s interpretation which can help you understand a number of the relevant issues. This guidance uses a points based system to identify whether, in HMRC’s view, a taxpayer is at risk being caught as being subject to PAYE. By applying a number of tests, points are awarded and ultimately the higher the points awarded, the lower the risk.
There are 12 tests in total and for each to be passed it is necessary to be able to provide supporting evidence.
It is interesting to note that the score for passing certain tests is sufficient to give enough points for the taxpayer to be placed into low risk by passing that test alone. On the other hand as the notes explain the points system cannot be considered in isolation and therefore failing all tests apart from one could still mean that an individual is actually employed and not self-employed. One test that does this is the “Substitution test”. This is split into two, the first part test being the right to substitute and the second for actual substitution. The right of substitution test (if passed) scores two points and the actual substitution test scores 20, a total score of 22 which in itself is within the low risk range.
It should also be noted that it is possible to inadvertently cherry pick those contracts which would comply whilst overlooking the ones that don’t. This is a danger in itself as although you would avoid the additional tax charges on those identified, this does not help for the remainder and the additional tax could become payable on those contracts which are not ultimately proven to be of a self-employed nature.
It is useful to have sight of H M Revenue & Customs guidance although it must be appreciated that, as mentioned above, this is not absolute law and your contract as a whole, both the written contract and its application, must be considered carefully. If there is any doubt whatsoever suitable advice should be sought.
Daniel has developed his expertise in the sector over 20 years acting for many GPs practices and health centres as well as locums and other healthcare professionals.
