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  • Maria Cristina Brodu

Legal and tax status differentiating employees and independent-contractors in England and Wales

This article illustrates all the different legal and tax working-statuses in the UK jurisdiction of England and Wales. Talent sourcing professionals can benefit from the information to better value all work experience that candidates developed in the UK when not directly employed.

Above: team of non-independent in-house workers, made up of direct and indirect employees


INDEPENDENT CONTRACTOR VIA ONE OWN LTD


When someone opens and registers a Limited Liability Company in England and Wales, one becomes the Ltd's director and shareholder, and the Ltd's employee and business owner.

A Ltd director must submit accounts to HMRC to pay Corporate Tax, and a shorter set of accounts to Companies House; additionally, a director must file a Self Assessment tax return, to declare one own salary (which is set by the director of the Ltd) and the dividends paid to the shareholders (taken from the Ltd’s profit after tax) in order to pay income and corporation tax on it (plus VAT if the Ltd's revenue is above £85K). The salary of the director is taken via PAYE scheme, Pay As You Earn (unless it is less than £123/week or £533/month, in which case there is no PAYE). Class 1 National Insurance Contribution, NIC, is also paid to HMRC (this will be at nil rate, but valid for state pension qualifying years for the director, if the director's salary - the amount of which has been set by the director or shareholders - is above PAYE threshold and below £242/week or £1,048/month).

A Ltd's legal identity is separate from whom owns and operates it: so the director cannot be held personally liable for the company's financial results (e.g. if a Ltd bankrupts, the director and all owners, the shareholders, are not liable). All contracts are signed with the Ltd.


SELF-EMPLOYED INDEPENDENT CONTRACTOR

One is self-employed when works for oneself as independent sole trader contractor without an Ltd (those who work as non-managed freelancer for occasional work, such as translators, dogs trailers, web designers, and all those who do task-based assigned work independently).

A self employed only pays individual Income Tax on net revenue after tax, and must file a Self-Assessment tax return (although, if total sales are below £1K per year, there is no need to register with HMRC). Plus one has to pay class 2 and class 4 NIC (VAT as for a Ltd).

Legally, if one is self-employed, is financially liable for the results of the business (e.g. if the business falls into debt, one own personal assets pay for it. If one is a personal trainer and a client sues for damages, one must use the personal insurance in his/her own personal name, etc). Every self employed individual is personally liable for legal action against her/his own business and must sign all business related contracts with one own personal legal name.


NON-INDEPENDENT CONTRACTOR VIA INTERMEDIARY ENTITY

Another way to be engaged into contractor work is by being hired and paid as employee by an umbrella company who intermediates with the end-client. In this modality one works for the end-client in-house (meaning at the end-client's office) and as part of the end-clients' s teams that are made of direct employees and such contractors via umbrella companies: both legal categories of workers collaborate in the same project and are managed by the end-client's management, who assigns and reviews the work of direct and indirect employees.

The umbrella company can stipulate the contract with an individual, who can invoice the umbrella company intermediary either as a person, or through their one own Ltd company.


(For example, in my case, an umbrella company hired me as their employee for working at RTKL as an individual in 2006 and 2007. On the other side, other umbrella companies engaged me as a Limited Liability Company, an Ltd, for working at HOK, FPA, ARUP between 2007 and 2014. In both cases, I had to invoice indirectly the payment of my engineering and architectural services to these end-clients, RTKL, HOK, FPA, ARUP: I had to get a signature on my invoice to the umbrella company by my managing director - who as an employee of my end-clients - so the umbrella could invoice the end client and pay me. This was required even if I worked as non independent contractor, collaborating in their mixed teams of direct and indirect employees, with my work reviewed by their directors. The indirect invoicing through an umbrella company intermediate was required also when my role was found thanks to my own business development and direct contact via emails and interviews with the end-client, to agree my collaboration in one of their project, without the help of the umbrella company to be engaged in such paid collaboration. Many times though the umbrella companies in the UK are also recruitment agencies, such as in the case of my first indirect employment in the UK at RTKL).


Umbrella companies comply with employment law, unless they engage a contractor via their own Ltd (only in the first case they deduct Income Tax, employee and employer Class1 NIC from gross revenue. If they engage a person though an Ltd, they pay the gross revenue).


DIRECT EMPLOYEE OF NON-OWN BUSINESS

Employees have extra employment rights, such as statutory leaves, minimum notice periods and theoretical protection against unfair dismissal and discrimination, if it's based on legally protected characteristics (although this is conditional to the possibility to evidence it, as the employees has the burden of proof). Class 1 NIC are deducted from the employee's salary.

The main differences between independent contractors and non independent employees (either directly hired or indirect contracted via umbrella companies) are the following:


  • employees must work a minimum number of hours (normally in all contracts in the UK one must sign that renounces the right to work less than 40 hours per week)

  • higher management is responsible for the employees' work (assigns and reviews it)

  • someone else cannot do the work of the employee (one cannot send a substitute!)

  • employees get paid statutory holiday (or a payment in lieu of matured holidays if they leave in the middle of a financial year) and leaves (such as statutory sick leave)

  • employees cannot choose where they work (because are assigned a office location and must work from there, with a team of other direct and indirect employees)

  • materials and equipment are provided to the employees (for example, they don't bring their own computers or book-notes at work, don't use their own phone, etc.)


The difference between non-independent contractors and employees is mainly that that contractors can invoice all the overtime hours they work (so their earnings are higher than those of their direct employed team mates), but cannot benefit from the possibility of joining a private pension scheme of the employer (who pay some additional employee's private pension contributions, in addition to those subtracted from the employee's salary).


Above: collaborative team of non-independent in-house workers (direct and indirect employees)


Note: the legal and tax status of indirect employee and non independent contractor - engaged by an umbrella company, that the worker invoices through her/his own limited liability company, an Ltd - is not listed on the information in the public domain because it's a variation of other legal and tax statuses that are described even on the www.gov.uk website.


I described this additional legal and tax status here on the bases of my experience in London, as I worked in that modality of non-independent contractor from 2006 to 2014, providing professional engineering and architectural services to global firm in that sector.


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