Reently, I was perusing the website or a well known business
coach who was comparing the advantages and disadvantages of a
dentist using the service of a self-employed hygienist with those
of an employed hygienist. He came down on the side of the latter on
the grounds that it was best not to provoke the taxman unduly into
"looking into his practice".
How justified are his fears and is there any foundation to his
phobia?
Without doubt, employment status is an increasingly difficult
area for dentists to deal with and recent development in the courts
mean that any practice owner should be aware of the ramifications
for their practice in the event of an HMRC enquiry into the
employment status of those presently treated as self-employed. This
distinction arises most often with regard to hygienists.
Let us remind ourselves just why so many hygienists and dentists
want the hygienist to be classified as self-employed:
* The National Insurance (NI) liability of a self-employed
person is much lower that that of an employee - and don't forget
that there is no employer's liability amounting to a whopping 12.8
%.
* The self-employed have a cash flow advantage in the timing of
income tax payments compared to employees
* The rules allowing tax relief for expenses are more generous for
self-employed individuals that for employees, where the rules are
notoriously tough.
You should also be aware of the fact that the practice owner
takes risks if he gets it wrong - i.e. if HMRC were to win the
argument that a self-employed hygienist is in fact an employee. If
he is proved wrong, he will be liable for the tax, NI, interest and
penalties due. It is therefore important to look at the underlying
engagement terms and get the employment status right from the
start.
There is no legislation to distinguish between employment and
self-employment but numerous cases decided in the courts have
provided guidance of indicative factors. There is also plenty of
advice from HMRC on the subject - but be careful - invariably, HMRC
will try to classify an individual as self-employed because it is
in their interests to do so.
This doesn't make their viewpoint correct - often they are just
"trying it on".
What are the steps that a practice owner and hygienist can take
to re-enforce the non - employee status of the hygienists? There
are a variety of key tests.
Choice
The parties cannot simply decide to treat working arrangements
as either self-employment or employment. It is not just a question
of the dentist saying "you are self-employed and have to pay your
own stamp". It is the circumstances of the working arrangement that
determine how the arrangement is treated. Even is there is a
written contract you have to establish whether or not the contract
terms were applied in practice. It is not just a question of
describing the arrangement as self-employment the contract must be
adhered to in reality.
Control
The degree of control or direction a dentist has over a
hygienist would be an important factor to consider in determining
the employment status. It would be important to establish who has
control of:
* What work is done
* When it is done
* How it is done
In my opinion, most hygienists would pass this test in
practice.
Financial Risk
HMRC have stated on record that "the greater the degree of
financial risk for the worker (hygienist) the more likely it is
that he or she will be self-employed". The basis of payment and the
surrounding financial circumstances of the arrangement will
therefore be important. Accordingly, should the hygienist be being
paid on the basis of a percentage of the fees, there is a definite
financial risk. For example if the patient does not turn up, the
hygienist will not be paid - a pronounced financial risk?
Quoting a fixed fee for a job is the ultimate in financial risk.
If the hygienist can profit by working quickly and obtaining more
work and hence being paid more, this points toward self-employment.
Conversely, if the hygienist is slow and runs into problems then he
or she will only be paid the fixed fee. The hygienist has to remedy
the faults at her own expense - again a strong indication of
self-employment.
If we examine the view expressed by the judge in the landmark
case of Hall v Lorimer, to decide whether a person is self-employed
or not it is necessary to consider many different aspects of that
person's work activity.
"This is not just a mechanical exercise of running through items
on a checklist to see whether or not they are present in .... a
given situation. The object of the exercise is to paint a picture
from the accumulation of detail."
In real life there are a whole host of factors some pointing
toward employment, some towards self-employment. Each factor has to
be given a different weighting, depending on the circumstances of
each case.
One has to look at the key factors - i.e. what is the picture
that is being painted? Workers are generally self-employed if they
are going into business on their own account and the responsibility
for their business's success or failure. Don't focus on trying to
build up as many points as possible. It's the picture that counts.
HMRC place much emphasis on the ESI (Employment Status Indicator)
tool which is available on their website. However, this has no
legal authority and will often be incorrect as it does not allow
for the use of judgement which is fundamental in an exercise of
this nature.
Summary
There are so many factors to be considered in determining the
employment status of an individual that it very rarely is a clear
cut decision and professional advice should be sought in all
circumstances.