The Pros and Cons of Engaging Drivers
This article is featured, alongside our regular column, as a full-length feature in Professional Driver Magazine. The published article can be found here….
In being asked to produce a definitive document by my esteemed editor, I must caveat this article by saying that one of the most important things is that you, as a hire and reward operator, are not supposed to decide whether your drivers are employed or self-employed.
What I mean by that, is that the expectation is that you will make the commercial decision as to your trading model and then measure that model against HMRC’s criteria. There is online testing tool (https://www.gov.uk/guidance/employment-status-indicator) which according to the HMRC:
“The ESI tool enables you to check the employment status of an individual or group of workers – that is, whether they’re employed or self-employed for tax, National Insurance contributions or VAT.
The ESI tool can help you if you’re:
- Someone who takes on workers such as an employer or contractor;
- An individual worker;
- Agency workers;
- Anyone providing services through an intermediary – referred to as IR35 arrangements”.
However, just to add to the complication, some of their criteria is laid out in law but some of it is their own interpretation. This interpretation (like all interpretations) can be questioned by the business owner or his trusted advisor, at appeal or tribunal. So, as usual, nothing is as simple as it first appears. The reality for many operators is is between compliance and cost savings. The old adage is that you can’t have your cake and eat it. However, there is a workable compromise.
Our industry is becoming increasingly diverse, technical and competitive. For many in the future unfortunately, the cashflow will get them before HMRC ever does.
On October 28, 2016, Messrs Aslam and Farrar won the right in tribunal against Uber, to be treated as ‘workers’. I have written much about this and its ramifications to the industry both good and bad. However, the term worker is not new, the regime wherein drivers are more aware of having these rights (whether they want them or not) is here.
How do we practically set out a system that values the driver, who in most cases not only are genuinely self-employed, want to be self-employed but are also as much a client to many operators as the people sitting in the rear of the car?
How do we, therefore, trade and keep all parties happy? The Driver, The Client, their accountant, the shareholders and HMRC.
How should operators engage their drivers? Please notice at this stage that I use the word engage, not employ or contract. I cannot stress enough how important it is to use the correct terminology, HMRC will latch on to your language. If you say employ, they say employ. In the same way, if you talk about your sub-contractors or engaged drivers, you are in effect predefining your view of their status. This is ok, as long as you are sufficiently prepared for your words to be used against you.
To employ refers to someone being put on a company payroll and paying Class 1 NICS, this also means that the employing party is subject to employers NI at 13.8% and statutory holiday and sick pay. So, what is the benefit of employing?
If you employ subject to the current terminology, they are under your supervision, direction and control. You can tell the driver when to work, how to work, how to present themselves and how to deal with the client. They are obligated to adhere to these, subject to reasonable treatment and legislation; like the working time directive and other employment rights. Is this the most suitable commercially? In truth, if you want to exert this level of adherence to your company practices – this is the way to do it.
Once again, however, life is not always black and white but a series of greys. In the wake of the current tribunals and the pending AL and gig economy cases, it is worth your while to prepare for a storm.
Trading vehicles? Firstly, it is important to look at your driver engagement to be suitable to your own working practice. People often ask me: what is the typical trading model in this industry? Unfortunately for technicians like me who need to put things in little pigeon holes – There is very little commonality. From pre-booked private hire cars taking cash, the out of town taxi circuit, incorporating public and private hire, executive circuits and on to the networks of small chauffeurs both sole trader and incorporated.
Let’s look at these trading models. It seems that for many in the hire and reward world, planning is a dirty word (I say many, but thankfully not all). We can’t really go in to too much detail here because everyone and every company has a different view to trading. However, to understand where we need to be, let’s look at the basics, there are initially only three ways to trade…
Sole traders: simple to set up but you are personally responsible for your business’s debts, and therefore can’t afford to get anything wrong. There is nothing to stop a sole trader using the services of other sole traders or subcontract to other sole traders. Once again, if you need that total level of control, it’s time to implement a payroll and all the incumbent taxes that go with it.
Partnerships: A partnership is the simplest way for two or more people to run a business together. You share responsibility for your business’s debts. You also have accounting responsibilities. The obligations and exposures however are like the sole trader.
Limited companies: If you form a limited company, the individual is protected, however there are more reporting and management responsibilities. Therefore, the contract chain is clearer. Limited companies can still however contract to other Limited companies and engage drivers in multiple ways. There does, however, have to be chinese walls, both contractually and in working practice, between these engagements.
Any of these entities can also choose how to engage their drivers. That means that we must also look at who the client is: Is it the driver, passenger or both?
Example: How and whom will you charge for your services? A full-service chauffeur company or a commission-only agency are two very different animals. It is very important when starting, growing, or acquiring a new business that you are aware of how HMRC will see you. In many cases, if you get your status right your VAT position will follow.
The following are my pointers for a simpler life. Be consistent in how you collect and pay money to your customers and drivers. Think about what makes you competitive. Talk to your accountant about the type of market you want to trade in and the company you want to become and let them help you put safeguards and compliance in place.
Let’s look at how these trading models take on their drivers. Here is a top nine (I couldn’t find ten) of current market engagement choices:
- Employed under contract. You will be expected to run a payroll and undertake formal reporting procedures, pay for their national Insurance and of course now provide a workplace pension.
- Self-employed sole traders engaged directly, sometimes known as affiliates or sub-contractors.
- A Limited company, with you as the director. However, if HMRC thinks that you have formed the Ltd company purely to avoid self-employment, you will find yourself entangled in Personal Service Company Legislation.
- Self-employed individuals engaged through a third party or intermediary
- A commercial contractor that sits in the contractual chain offering driver services.
- A Back-office support service. Offering admin support to the self-employed driver who is contracted directly to the operator.
- Traditional umbrella – an employed short term worker contract
- Hybrid payment models, where the worker is on a scheme which makes him self-employed for his status but chooses to pay PAYE taxes and NI.
- There are also a few hangers on for offshore schemes which still exist despite new legislation because they are PAYE based.
Please note, some of these are supported by HMRC, some of these are stood or sometimes misunderstood by them and one or two just make the taxman downright angry.
There is still no statutory definition of what constitutes a self-employed contract. Historically case law identifies the badges of employment being, personal service, mutuality of obligation and control, which has now been redefined under supervision direction and control, these are the fundamentals of an employment contract.
BIG MISCONCEPTION – HMRC used to concentrate on such things as provision of driver services only, against the supply of tools of trade (that’s a vehicle to you and me). But, that is (by current trend) not the final word on how it is looked upon. It is increasingly less important (because of recent cases) whether you supply cars or not, either rental or company.
Good news for those who are unsure of whether the supply of cars is a flaw in their plan, bad news for those with ridiculously complicated systems of renting cars through separate companies with different ownerships (you know who you are).
A new HMRC team has recently been announced to ‘consider’ the issues of ‘false self-employment’. This is possibly the wrong question and it is time to take a wider look at general working practices and reconsider the underlying approach to tax and social security. For there is a significant difference between the treatment of the employed and the self-employed, businesses are likely to ‘play the system’, trying to fit into the lowest cost, and most lightly regulated structure. The one big clue is that the courts (as I have said many times) have shown that they will support or condemn your engagement contracts subject to how far they reflect your actual working practices.
Finally, as I always point out, please don’t blame me or beat yourself up, if what I have said is either a revelation or makes you shout at the page. Or, for that matter, seems overly confusing. The law and its interpretation is a shapeshifting beast, subject to each new precedent or tribunal decision. Governments and administrations change and realign their perspectives and therefore HMRC (which is after all just a government agency) can also be subject to new targets and benchmarks at a whim.
What was right five years ago, is not always relevant today. It is important to keep up your compliance and revisit it at least annually. The information I have supplied is not necessarily right for your individual situation, always seek professional advice.