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Status stand-off

A client has recently started working for an organisation which asserts that he is 'freelance' and self employed. Whilst there is evidence to support this conclusion, it is equally arguable that my client is actually an employee.

On the basis that it is a borderline case, are there any obligations on either me or my client to obtain a status ruling (which would not render my client very popular with the 'employer')? And, if my conclusion (were I ever asked to judge the situation) was that the relationship is that of employer/employee, does that opinion put me under any obligation to make a report to the National Criminal Intelligence Service on the basis that insufficient Class 1 National Insurance contributions are being paid?

(Query T16,487) — Resh.

Whilst 'Resh' has evidence to support self employed and employed status, the query suggests that he has already begun to form an opinion that all is not well. Also, the extent to which the client is willingly or knowingly involved in any deception taking place is not clear.

The prime obligation is on the person making use of his client's labour or services (the 'engager') to correctly determine status and operate pay-as-you-earn on all payments made in an employer/employee relationship. Any error in this will be brought to light in a Revenue employer compliance inspection. If status has been incorrectly applied, the engager (the employer) will be liable to account for income tax and Class 1 National Insurance, together with interest and penalties on the payments made to employees. It is better to get this right from the outset. Whilst there are provisions to collect pay-as-you-earn liabilities from employees, I have only ever seen these being used in the cases of directors where it could be shown that they ought to have known what they were doing.

The client has a duty to make a full and accurate return, to the best of his knowledge and belief, of his income in his self-assessment tax return. If 'Resh' is a member of a professional body he has professional ethical duties to fulfil.

His first duty is to his client, to help him to fulfil his self-assessment duties. If his client is clear about his employment status, then 'Resh' is under no obligation to make further enquiries. He should point out that the ultimate responsibility for the self-assessment tax return is the client's. If the client asks for advice on status, then 'Resh' will need to make full and sufficient enquiries to enable him to form an opinion. He needs to be sure that he is sufficiently experienced in this type of work to be competent. If the result is that employment status is appropriate, then this should be pointed out to the client. If it is not clear, (as may be the case here), 'Resh' should point out that greater certainty may be obtained by seeking a status opinion from the Revenue. 'Resh' can assist with this by drafting a suitable letter and being sure to give due weight to the favourable factors (whilst not hiding any of the information). The Revenue officer will want to be sure of all the facts before giving a written opinion, and will consult with a status inspector experienced in this field.

The test of whether to make a report to the National Criminal Intelligence Service is if the adviser has 'knowledge or suspicion' of a reportable offence. It is not necessary for 'Resh' to have formed a conclusion on the question of status, and hence whether his client (or the engager) is guilty of the common law offence of theft by avoiding his (or their) tax and National Insurance liabilities. Knowledge of an offence is clear-cut. Suspicion is something which the profession will become more used to with the new Money Laundering Regulations. The Chambers Dictionary definition which was quoted in Queensland Beacon Pty v Rees is 'A suspicion that something exists is more than mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust amounting to a slight opinion, but without sufficient evidence'.

This sentence should be on everyone's desk (though perhaps out of sight of clients, so as not to be guilty of 'tipping off'!). Suspicion is a lower threshold than any definite conclusion, and it is likely that a report to the National Criminal Intelligence Service ought to be made at an earlier stage before a firm adverse conclusion is reached. But this seems to be a borderline case and it may be too early to say that a positive feeling has arisen either way. If the client is anxious to resolve matters, and 'mistrust' arises over the person engaging the client, the 'engager' will need to be reported in the first instance for suspected failure to operate the pay-as-you-earn system.

Issue: 3977 / Categories: