Guidance - Determining the Employment Status of Service Providers

1. Introduction

The University is committed to engaging Service Providers (per HMRC, "Service Intermediaries") in line with relevant UK legislation. University employees responsible for engaging Service Providers must ensure that such services are engaged in a way that is compliant with such legislation and does not facilitate any form of tax evasion.

This procedure provides guidance on determining the employment status (including for tax purposes) of individuals, partnerships and "Personal Service Companies" who will be providing services to the University. The outcome must then be used to inform how the individual is engaged and paid.

If HMRC judge that the University has not engaged and processed the payment for a service provider on an appropriate basis then the University will be liable for any outstanding employee Income Tax and NICs, employer NICs, Apprenticeship Levy plus applicable interest and penalties. The University will also be potentially liable under the Corporate Criminal Offences Act 2017 and face prosecution and/or an unlimited fine.

Those engaging Service Providers must follow this procedure in full, including the submission of all required documentary evidence. Any failure to submit the required evidence will result in the process being halted until such evidence is provided.

 

2. Service Providers

The University receives services from a wide range of providers. The Service Providers in scope for this policy are:

  • individuals who provide their services personally
  • Individuals who provide their service through an ‘intermediary' such as:
    • their own limited company (known as a “personal service company” (PSC)); or
    • when engaged through a partnership

These individuals usually identify as self-employed and such models are often used by IT consultants, project managers, business analysts and other suppliers of professional services. Within the Higher Education sector, specialist lecturers on an occasional basis.

The Intermediaries’ Legislation (known as IR35) sets out the rules which affect tax and National Insurance contributions when certain service providers are contracted to work for a client, particularly when this is through a third party (intermediary), such as their own limited company.

Where it is established that the service provider is ‘doing a similar job, in a similar manner’ to that of an employee, then the University must calculate and deduct employee Income Tax and National Insurance Contributions (NICs) from the individual’s invoice prior to processing. The University will also be required to calculate employers NICs and Apprenticeship Levy and pay these over, along with the employee Income Tax and NICs, to HMRC via the monthly Real Time Information (RTI) process.

This applies to the engagement of any service provider, who intends to provide services as an individual, partnership, or PSC including UK nationals working/living overseas, foreign nationals living/working in the UK and foreign nationals living/working abroad, as it is the nature of the intermediary in each case that will determine the employment status for tax purposes.

In addition to following this policy and procedure, engagers of Service Providers must also comply with the University’s procurement policies. Any conflicts of interest must be declared to Procurement upon completion of the New Supplier Form.

3. The 'Check Employment Status for Tax' (CEST) Service

To support staff sourcing and appointing external service providers in determining the employment status of the service providers (including for tax purposes) HMRC have developed an online Check Employment Status for Tax (CEST) tool.

The CEST tool provides HMRC’s view of the employment status (for tax purposes) of a particular engagement. It asks a series of questions about the circumstances, before providing an indicative determination on whether or not the engagement should be classed as employed for tax purposes.

The tool can reach a number of outcomes as listed below:

  • The Intermediaries Legislation does not apply to this engagement
  • This engagement should be classed as self-employed for tax purposes
  • Unable to determine the tax status of this engagement
  • This engagement should be classes as employed for tax purposes 

It is essential that the tool is completed accurately, therefore any uncertainty over the meaning of particular questions within the CEST tool should be raised with the appropriate local HR Team in the first instance.

4. Procedure

The procedure below outlines the typical process to be followed by the University when determining the employment status of a new service provider.

Determination of Status

  1. The budget holder or manager (the engager) identifies a potential service provider.
  2. Before confirming any engagement with a service provider, the engager should complete the Check Employment Status (CEST) Tool. The tool features self-contained guidance; however advice can be sought from HR or Finance if necessary.
  3. The output from the tool should then be saved as a PDF*, then emailed to the relevant local HR Team along with a completed copy of Form - Service Provider Task Brief (this includes further basic details of what the piece of work will entail) and any other relevant supporting documentation. The HR Team will then review the outcome and endorse or action accordingly via email, with further discussion taking place with the engager as required.

    (*To save as a PDF, click ‘print this page’ on the results page, then in the ‘Print’ options box click the ‘Change’ button under the ‘Destination’ section, then select ‘Save as PDF’, then click the blue ‘Save’ button)

Supplier/Employer set up based on CEST status

The specific outcome of the CEST tool will determine the action required as per below:

a) 'The Intermediaries Legislation does not apply to this engagement’

Once endorsed by HR, the engager should ask a Purchasing Officer in their area to follow the New Supplier Process for Individuals, Partnerships and Personal Service Companies.

Any supplier invoices will be paid gross.

 

 


b) ‘The engagement should be classed as self-employed for tax purposes’

Once endorsed by HR, the engager should ask a Purchasing Officer in their area to follow the New Supplier Process for Individuals, Partnerships and Personal Service Companies.

Any supplier invoices will be paid gross.


c) ‘Unable to determine the tax status of this engagement’

In these cases, the relevant College/US HR team will assist the engager in assessing the employment status of the service provider and will seek advice from the Head of Pay & Pensions where necessary.  In these cases the status must be established as one of the other three designations and then the relevant process for setting the service provider up as a supplier or employee followed.


d) ‘This engagement should be classed as employed for tax purposes’

  • Income tax and NICs will require to be deducted from the supplier invoice prior to payment. In such circumstances, the following should take place:
  • The engager should discuss the outcome (and share the CEST tool output) with the service provider at an early stage (particularly before any invoice is issued or before work is performed/undertaken) to ensure that they are aware of the potential impact on any payment they might receive from the University. It may be appropriate to outline potential options as per below.
  • Consideration should be given, in conjunction with HR support, as to whether or not an employment contract or casual worker arrangement would be more appropriate in line with the University’s Extended Workforce Policy.
  • If it is decided that the issue of a contract of employment or a casual worker arrangement would be appropriate, then this should be established in line with the procedures outlined within the Extended Workforce Policy and normal recruitment procedures.
  • If it is decided that it would still be appropriate to set the service provider up as a supplier, then the following steps must be taken:
  1. The engager must inform the supplier by email of the decision to class them as 'Employed for Tax Purposes' using the Template Email - Notification of CEST Tool Outcome as a guide. This must outline the reason for doing so and the fact that they will have income tax and NICs deducted from their invoices.
  2. The Form - Starter Checklist for Suppliers should also be sent at this stage, for the supplier to complete and return as part of the new supplier setup process. The New Supplier Payroll Information must be sent to Payroll on finance-payroll-pensions@glasgow.ac.uk.  A copy of this email must be retained.
  3. The engager should then ask a Purchasing Officer in their area to follow the New Supplier Process for Individuals, Partnerships and Personal Service Companies.

Income tax and NICs will then be deducted accordingly on payment of any supplier invoices.


5. Notification of Determination

In all cases where a potential service provider is assessed as d) “This engagement should be classed as employed for tax purposes” they must be notified as outlined above.  In any other case where a service provider requests a written response to explain why a particular outcome was reached (i.e. in scenarios where this has not already been carried out up front) then the University (specifically the engager, or the individual who would have been the engager in cases where the Service Provider is not engaged) is obliged to provide a written response within 31 days. The Template Email - Notification of CEST Tool Outcome  can be adapted for this purpose.

Where labour is being supplied through a recruitment agency, the engager should ensure that the agency are informed that the work falls within the scope of the IR35 legislation.

5. Status Disagreement Process

Where a potential Service Provider disagrees with the determination (after having received feedback, including the output from the CEST tool) then they may invoke the status disagreement process as outlined below: 

  • The Service Provider should in the first instance make representations to the relevant local HR Team, stating that they believe the CEST tool output to be wrong and explaining their reasons for this belief.
  • The University will then form a Status Disagreement Review panel (Typically the Head of Pay & Pensions or the Tax, Treasury and Reporting Manager and the HR Policy and Employee Relations Lead) to review the relevant documentation (including the Service Providers statement) within 45 days and respond to either: 

1. Confirm that the original outcome is correct and provide reasons for this. There is no further right of appeal beyond this stage.

 OR

2. Confirm that the original outcome has been revised and provide a new determination statement (following which the process would continue from the relevant stage above)

 

  

Human Resources
April 2021