The long-running saga of "employed or self-employed” continues. There are big differences between the tax treatment of the employed and the self-employed and the penalties for getting it wrong can be severe. PAYE applies to the former and not the latter, which means that payments to an employee carry employer’s national insurance contributions (NICs). Payments to an employee also have income tax and employee’s NICs deducted at source and the regime by which employees can obtain tax relief for expenditure incurred in earning their income is far stricter than that which applies to the self-employed. It is not surprising, therefore, that businesses and HM Revenue and Customs (HMRC) often take differing views as to whether a person is employed or self-employed.

The latest business to be caught out is Weight Watchers. Despite carefully drafting "a contract for services" for their 1700 class leaders, an Employment Tribunal has decided that each of those class leaders were really employees and not self-employed after all – costing the company nearly £24m in back taxes to 2001.

We suspect that with a huge financial black hole to fill, the taxman will look to make some easy money by targeting businesses who claim that workers are self-employed. The real danger for employers is that the taxman can demand back taxes including employer national insurance contributions and PAYE taxes.

So what exactly is "self-employment"? The taxman is actually very helpful and sets out clear guidelines at http://www.hmrc.gov.uk/employment-status. By answering a number of ‘yes or no’ questions – the same questions that PAYE inspectors will use when reviewing payments made – they are hoping to reduce the number of disputes regarding employment status. In general, if the following questions can be answered ‘yes’, the person is likely to be self-employed:

• Is the payment made for doing the job rather than for the hours worked?
• Does the person doing the job decide how it is to be done, who will do it and when it is to be done?
• Does the person doing the job supply their own tools?
• Does the person doing the job do similar work for other customers?
• Does the person doing the job carry commercial risk (i.e. if the job is not done properly, will they have to rectify it for no further payment)?

It's perfectly clear that employment tribunals will consider not so much what any contract says about whether a worker is actually employed and self-employed, but what is the reality e.g. does the "self-employed consultant" also do work for other people, can they substitute another's services for their own, do they use their own equipment and is there a method of working specified in detail by the business.

Our advice is to ensure you review your self-employed staff and check that they really are self-employed. Have a look at the HMRC website but if you're still in any doubt, don't hesitate to contact our experienced employment law solicitor Nigel Mills via email or on 01722 422300.