Issues to consider: Employment status: Our policy on employment status
HMRC considers the same factors when determining employment status for direct tax purposes and for VAT. As a result, the status should be the same regardless of which section of HMRC is considering it, unless there are clear reasons why it should not be. There is also a common approach to the determination of employment status for National Insurance purposes. For example, HMRC has the power to determine by statutory instrument that particular groups of workers should be treated as Class 1 (employed) or Class 2 (self-employed).
For direct tax purposes, earnings from employment are normally chargeable as employment income and earnings from self-employment are chargeable as trading income. Consequently, persons who have income from more than one source can be chargeable in respect of both employment income and trading income. If a trader is chargeable in respect of both employment and trading income, only the gross monies earned from the work chargeable as trading income should be considered as being potentially subject to VAT and counted when considering whether VAT registration is required.
HMRC has agreed guidance with certain industries where large numbers of freelance workers operate and there is a need for consistency. We will normally follow the agreed guidance for VAT purposes. Further details of some of these agreements can be found under the relevant trade headings in VTAXPER60000.
Exceptions to normal practice
There are occasions when we cannot follow the same practice for direct tax and VAT purposes. For example, the treatment of office holders for direct tax purposes is not determinative of whether the activity is undertaken by way of business for VAT purposes: (see the VAT Business/No-Business Manual - VBNB41000). HMRC sometimes agree to tax all of a person’s income as employment income or as trading income for administrative convenience, even though that person may receive income of both types. There will be instances where a trader argues for a different VAT status from his direct tax status. In other instances, the personal tax status of a person may be unknown or undecided. On all these occasions you will need to examine the contracts that have been entered into, to decide which are contracts of service and which are contracts for services.
The employment status diagram illustrates our general approach to deciding employment status. However, a number of trades have particular arrangements with HMRC. You will find guidance on these under the relevant trade headings in VTAXPER60000.
You may find it easier to follow the diagram in this tabular form.
The Employment status diagram as a table
|Question 1 - Is the trader an agency worker?||Yes - Examine the contracts, consulting VTAXPER34000. Those that are a contract of service are outside the scope. Those that are a contract for services are taxable and the direction of supply needs to be determined.|
|No - Go to Question 2.|
|Question 2 - Under what schedule is the trader taxable for direct tax purposes?||Trading income - Go to Question 3.|
Employment income - All income is outside the scope of VAT. Go to Question 4.
|Don’t know - Examine the contracts, consulting VTAXPER34000. Those that are a contract of service are outside the scope. Those that are a contract for services are taxable and the direction of supply needs to be determined.|
|Question 3 - Does the trading income assessment include any employment income earnings by agreement?||Yes - Trading income is subject to VAT; employment income is outside the scope. Go to Question 4.|
|No - All earnings are subject to VAT. Go to Question 4.|
|Question 4 - Has the trader disputed your decision?||Yes - Examine the contracts, consulting VTAXPER34000. Those that are a contract of service are outside the scope. Those that are a contract for services are taxable and the direction of supply needs to be determined.|
|No - No action.|