Employment and self-employment in the UK and Belgium
Determining whether an individual should be treated as being employed or self-employed in the UK is not always straightforward, but the difference in tax and employment law implications can be significant. In addition, special rules need to be considered where individuals act as employees but provide their services through personal companies.
The UK government is currently consulting on changes to both of these areas. In this article we provide an update on the current UK position, and the changes that are being considered.
By way of comparison, Hilde Tielens of Van Havermaet in Belgium has also kindly provided an overview of the rules in Belgium.
How to determine employment status
In many cases it will be obvious whether an individual should be treated as employed or self- employed, but there are increasing numbers of scenarios where the answer is not clear. The UK legislation relating to employment status is extremely limited, and so in more marginal cases, employment status decisions must be made on the basis of principles that have emerged from courts and tribunals over the years.
The sorts of factors that need to be considered in making employment status decisions include:
- Whether there is mutuality of obligation (i.e. whether the individual agrees to provide work in consideration for the engager providing payment);
- Whether the engager has control over the individual;
- Whether the individual is required to provide personal service;
- Whether the individual provides his own equipment;
- Whether the individual takes financial risk;
- Whether the individual is integrated within the engager’s business.
The implications of employment status
Where a business takes on an employee in the UK, the business will have to process payments to the employee through a payroll scheme, deduct tax and employee social security contributions, and pay these amounts directly to HM Revenue and Customs. The business will also have to pay employer social security contributions of 13.8%, and it may also need to make pension contributions and pay the apprenticeship levy.
Where a business takes on a self-employed individual, it simply pays the individual’s fees, and the individual will be responsible for his or her own tax and social security contributions (although if the individual is classified as a “worker” the individual will be entitled to some limited employment rights). For the self-employed individual, the tax liability will be the same as that of an employee, and the social security contributions will be similar (these are charged at rates of 0%, 9% and 2%, rather than 0%, 12% and 2%); crucially, however, these are not deducted at source but accounted for much later.
A written agreement in which the above criteria are clarified and explained is a good start in being able to demonstrate a particular status. However, the factual situation will always prevail, and situations where contractors and employees are working side by side in the same function can be indicative of sham self- employment. The authorities have made a big issue of sham self-employment and make very thorough investigations in this area.
The implications of employment status
Employees enjoy better social security benefits than self- employed individuals. For example, they currently receive a higher state pension, and are entitled to benefits such as unemployment pay when dismissed, higher sick pay and 15 weeks of paid maternity leave. These advantages do not exist, or exist only partially, in the case of self-employed individuals.
There is no difference in treatment regarding income tax, but there is a difference regarding social security contributions.
Self-employed individuals pay 20.5% social security contributions, calculated on their total yearly net income.
For employees, there is an employer social security contribution of 28%-38% on top of the gross salary (depending on the type of employee and the industry they work in, and subject to certain exemptions and reductions), and there is an employee social security contribution of 13.07%. In the event of a situation of sham self-employment, the consequences rest on the employer (i.e. the client that is using the services).
If either the authorities or the courts decide that there is a case of sham self-employment the ‘employer’ will face sanctions as it will not have fulfilled the Belgian compulsory ‘employer’s’ formalities. In addition, there may be criminal penalties (€4,800 to €48,000 and/or imprisonment for between six months and three years), or civil penalties if the criminal penalties are not upheld (€2,400 to €24,000).
For employees, there is an employer social security contribution of 28%-38% on top of the gross salary (depending on the type of employee and the industry they work in, and subject to certain exemptions and reductions), and there is an employee social security contribution of 13.07%.
In the event of a situation of sham self-employment, the consequences rest on the employer (i.e. the client that is using the services).
If either the authorities or the courts decide that there is a case of sham self-employment the ‘employer’ will face sanctions as it will not have fulfilled the Belgian compulsory ‘employer’s’ formalities. In addition, there may be criminal penalties (€4,800 to €48,000 and/or imprisonment for between six months and three years), or civil penalties if the criminal penalties are not upheld (€2,400 to €24,000).
Other issues and proposed changes
Where self-employed individuals work through their own personal companies, the same rules (the four general criteria and the nine specific criteria set out above) are applied to the individual behind the personal company.
For the end client, working with a personal service company has an advantage. Belgian courts accept that, in the written contract between the client and the service company, a clause can be inserted that will result in the service company being obliged to safeguard the client for all payments, salaries, damages, interests and judicial costs, etc. in the event of sham self- employment.
Subject to the above point, it is of the utmost importance that an engaging business determines very clearly the status of the person they are engaging prior to the beginning of an engagement. The position needs to be constantly reviewed, as the status can change in the course of the project.
Key points
- In both jurisdictions, various different factors need to be considered in order to determine whether an individual should be treated as an employee or as a self- employed individual.
- There are financial and administrative costs to taking on employees (perhaps the most significant of which is employer social security contributions), and the penalties for wrongly treating someone as self-employed can be severe.
- The risk to businesses of wrongly treating an individual as self-employed can be removed by engaging with the individual through a personal service company, although this is likely to change in the UK in the next few years.
Morison KSi Member Firm
– By Hilde Tielens of Van Havermaet and Andrew Constable of Kingston Smith