Learn how HMRC rules apply to the security operatives you deploy

You need to know their employment status

Part of the amount of tax and national insurance you must pay to HM Revenue and Customs (HMRC) depends on the ‘employment status’ of the operatives you deploy – that is, whether they are employed or self-employed.

You should check their employment status in both of the following:

• employment law – to see whether they have an employee’s rights
• tax law – to see whether you are responsible for PAYE and National Insurance contributions

You and they may have to pay unpaid tax and penalties if their employment status is wrong.

Use the guidance HMRC provides

HMRC provides guidance and tools to help you work out if someone is employed or self-employed.

You should:

• use their Check Employment Status for Tax (CEST) tool
• read their employment status guidance
• read their employment status manual

Or you can contact HMRC directly.

Think about the contract

You need to work out whether the contract you have with the operatives you deploy is a contract of service (employment) or a contract for services (self-employment).

Contracts may be written, oral, implied or a combination of all 3. This means that the contract may not be defined in just 1 document. It can include:

• any instructions, handbooks, or other documents that form part of their working relationship with you
• what you say or do and what they say or do
• what happens in practice

Work out the employment status of your operatives

You can use the ‘employment status indicators’ derived from case law to determine someone’s employment status.

Some of these indicators are:

• mutuality of obligation
• personal service
• control
• financial risk
• business on their own account

We explain each of these below. The ESM0500 - Guide to determining status section of HMRC’s employment status manual provides more detail.

Mutuality of obligation

‘Mutuality of obligation’ establishes whether a contract exists. A contract exists when a worker accepts your offer of work and you pay for the services provided by the worker.

This can be present in both employed and self-employed engagements and does not determine the nature of the contract between you.

Personal service

Someone who is employed must provide a ‘personal service’ – that is, they must carry out at least some of the work themselves. Linked to personal service, is whether a worker has a genuinely unrestricted right to provide a substitute.

A genuine unrestricted right of substitution may negate an employment relationship. That will only be the case if the substitution clause is so wide as to permit, without breach of contract, the worker to decide never to personally turn up for work at all. The worker would be responsible for sourcing and paying an alternative worker to provide the services, which neither you nor the end client could veto.

If you or the end client are able to restrict a worker’s ability to provide a substitute, or could veto this, then such a restricted right to substitution would not prevent the worker from providing a personal service.

Control

You must have a sufficient right of control over the operatives you deploy for a contract of employment to exist.

There are 4 elements of control to consider. These include control over what, where, when and how the work is done. You do not need all 4 elements to be present to have a sufficient right of control.

It is the right to exert control that is significant, not whether that right is exercised.

Financial risk

A strong indication of self-employment is whether the worker incurs any financial risk whilst carrying out the work for you. “Financial risk” means risking their own money by buying assets and paying their running costs, overheads and materials.

“Financial risk” in this context does not include such things as:

• travel expenses to/from the place they are working
• paying for their own clothes
• use of their own small equipment, such as a phone, torch or pen

This is because these things are common to both employed and self-employed workers.

Business on their own account

A person is probably self-employed if they are responsible for:

• investing in capital
• managing overheads, wages and debts
• making a profit or a loss

Other factors

The presence or absence of rights or benefits is not a significant factor in whether someone is employed or self-employed, nor is the intention of either party. To determine if an operative is employed or self-employed you need to establish all of the facts and then make an informed decision by looking at the whole picture.

Rules for employment intermediaries (agencies)

An employment intermediary is a person or business who arranges for someone to work for a third person. They are also often known as an ‘agency’ or ‘employment business’.

You are an employment intermediary if you supply workers to work for a client or another employment intermediary, and the client then pays you or someone connected to you for the worker’s services. The client is who the worker does the work for.

If you are an employment intermediary there are special ‘agency’ rules that apply if the workers are not already employees.

The agency rules will apply when:

• the individual workers personally provide services to a client, regardless of whether they have a right to provide a substitute (see Employment intermediaries: personal services and supervision, direction or control)
• such services are provided, or the client pays for such services, as a result of a contract between the client and you

When the agency legislation applies, the worker is treated as holding an employment with you and you are responsible for operating PAYE/NI.

The agency legislation does not apply to you if you can provide clear, unequivocal evidence that no-one has the right of supervision, direction or control over how the operative provides their services (see ESM2037 in particular), or show that the workers are already engaged as employees with PAYE/NI being fully accounted for.

Find out more about the agency legislation

You cannot use HMRC’s Check Employment Status for Tax (CEST) tool to decide if the agency rules apply.

Labour supplied to you by a third party

If the agency legislation applies and you use labour supplied by a third party, then the security company which contracts directly with the client is responsible for operating PAYE/NI, unless is it already being accounted for down the chain. Please see ESM2039 for more information.

It is important that you do the appropriate due diligence if you receive labour from a third party and contract with the clients to supply workers. If the agency legislation applies you will potentially have to account for this or ensure it is being accounted for down the chain. Your due diligence checks need to cover this.

It is important that you consider how to safeguard your business from financial and reputational risk.

Read HMRC’s advice on due diligence.

If you are an SIA approved contractor

Indicator 4.2.1 of the ACS Self-Assessment Workbook requires that an approved contractor “complies with all the relevant tax and national insurance legislation concerning people they deploy”. It also says that “all the organisation’s people must be employees unless the organisation can evidence otherwise.”

This means that you must:

• know the employment status of your operatives – that is, whether they are employed or self-employed
• consider if the agency legislation applies for anyone you have determined to not be employees

Your assessor will ask to see evidence of this. If you cannot provide this evidence, or if the evidence is inconclusive, then they will raise an improvement need.

There are 4 ways to show that you meet the requirements of indicator 4.2.1. You can:

• provide evidence that show your operatives are employees, or treated as employees by applying the agency legislation with the appropriate PAYE/NI deducted
• demonstrate that you have defined roles that HMRC have confirmed as correct
• provide documented results from HMRC’s ‘Check Employment Status for Tax’ (CEST) tool
• show that you comply with a recent court/tribunal ruling

We explain each of these in more detail below.

Evidence showing the employment status of the operatives you deploy

The evidence you provide must:

• demonstrate the correct employment status of your operatives
• demonstrate that you are making the correct PAYE/NI contributions

Some examples of the evidence you can provide are:

• the names of all of the operatives you deploy
• operative’s roles and responsibilities
• contracts with customers, suppliers and individuals
• assignment instructions
• training and induction records
• invoices
• timesheets
• rotas
• payslips
• PAYE real time information (RTI)
• expenses reimbursements
• holiday records and payments
• employment intermediary reports

We may interview your staff, customers and suppliers to confirm that the employment status you have declared is true and accurate.

Defined roles

You have defined roles (such as ‘employee’ or ‘self-employed’) and HMRC has confirmed in writing that the employment status identified in these roles is correct.

You must review these defined roles every year to confirm that:

• the roles or contractual terms have not changed
• relevant legislation and/or HMRC guidance has not changed

Correspondence from HMRC will cease to be valid if either or both of the following apply:

• there are changes to the role, contract, legislation or HMRC guidance
• the correspondence is more than 12 months old, except in exceptional circumstances and at HMRC’s discretion

Documented results from the CEST tool

The answers you give to the CEST tool must be true and accurate. Neither we nor HMRC will accept results achieved through contrived arrangements designed to get a particular outcome from the tool. We would treat this as evidence of deliberate non-compliance, which would result in sanctions.

Where there are changes to the role, contract, legislation or HMRC guidance, you should use the CEST tool again to check if you get the same result.

You cannot use HMRC’s Check Employment Status for Tax (CEST) tool to decide if the agency rules apply.

Court or tribunal rulings

Where a court or tribunal makes a decision on someone’s employment status, you may provide evidence that shows you are compliant with that ruling if it is identical to the working arrangements of the operatives you deploy.