One of the main trends in employment circles since the current recession started is for employers to replace full-time members of staff with self employed workers. Every week without fail we hear of more companies going down this route, some arrangements being more genuine and commercially sound than others.

We have commented a few times before around the tax complexities of such arrangements and the financial risks faced by the employer if they are found to be paying self employed workers who are nothing other than employees "in disguise". This is not a new issue as it has been around for years and will continue to do so as long as we have vague and useless legislation defining exactly what is an employee. However, what is changing just now is that employers are having to face up to a new breed of challengers to the whole employment status situation - the workers themselves ! This makes employment status even more riskier and problematic for employers than ever.

Why self employment is the preferred option

Let's remind ourselves why self employment is an attractive proposition both for the paying company and the worker

Benefits for Employer Benefits for Worker
  • Less Cost
    • No Class 1 NI on earnings paid
    • No obligation to provide employment benefits, e.g. SSP, leave, pension, etc
    • No obligation to provide training
  • More flexibility (hire and fire with less hassle and more quickly)
  • More money
    • Reduced NI
    • More generous tax reliefs
    • Higher weekly rate (to compensate for loss of employment rights)
  • More flexibility (sometimes !)

 

Attacker number 1 - HMRC

 

This is no secret and well documented. HMRC hate to miss out on all the extra money that is up for grabs in what they call "false self employments" which is why it is always the number one target area during PAYE enquiries or audits.

Some of the triggers that may prompt a challenge on the employer by HMRC, or some awkward questions at the very least, include:

  • Investigation into the affairs of a worker engaged by the employer on a self employed basis
  • Regular payments being made to the same worker(s) identified during a PAYE audit or review
  • A sudden drop in employee numbers combined with an increase in subcontractor costs
  • Intelligence from external sources, including from the tax evasion hot-line and anonymous tip-offs
  • Random enquiries

 

The new attackers - the workers

When everything is going well, both parties seem perfectly happy with the arrangements being self employed. However, a couple of recent cases - Yurdaer Yetis v HMRC and the Stringfellows unfair dismissal case in the Appeal Court highlight the growing trend for disgruntled workers to argue they are actually employees when they are faced with losing out on some money when the relationship takes a turn for the worse.

The Yetis case is particularly interesting as HMRC actually sided with the employer in arguing that Yetis was NOT an employee but the Tribunal decided he was and therefore it was the company's responsibility not Yetis' to deduct and pay over tax and NI on the earnings paid.

Whilst the Stringfellows case was an employment law issue, which the lap-dancer lost as the Tribunal decided she WAS self employed and could not therefore claim unfair dismissal, there is growing evidence that HMRC are taking considerable note of Employment Tribunal judgements and applying the same logic to their own tax cases involving employment status (when it suits them obviously !).

Triggers for a claim by the employee to be (re)classed as an employee could include:

  • Contract terminations (where they would not qualify for redundancy as self employed)
  • Breakdown in the relationship and the worker trying to "get back" at the employer
  • A challenge by HMRC into self employed tax payments (like in the Yetis case)
  • A dispute over pay or working conditions

Potential consequences for the employer

For some businesses these could be catastrophic where a worker is ruled retrospectively to be an employee:

  • Huge costs to pay to HMRC - PAYE, NI (employer and employee), interest and penalties. Going back 6 years (or more if fraud is suspected)
  • Payments to the individuals as compensation e.g. for redundancy pay, holiday pay, etc. Again certain payments could go back years.
  • Loss of reputation if cases become public
  • Damage to relationship with HMRC
  • Poor risk rating / increased focus by HMRC across all taxes
  • Significant costs and time involved in defending tax and/or legal claims through the courts

Conclusion

There are still some circumstances where it is perfectly justifiable in paying a worker gross as a self employed individual where it can be proven that no employer/employee relationship exists.

However, in light of recent developments and Tax and Employment Tribunal cases involving challenges from workers as to their status, it is even more critical for employers to get things absolutely spot-on if they are looking to avoid costly court proceedings and the even costlier consequences of dodging their employment responsibilities.

Many employers enter into such arrangements lightly, often with the view that "everyone else is doing it so why not" but the fact is they could be leaving themselves open to costly and time consuming challenges if the arrangements are nothing other than completely robust from both an employment tax and employment law point of view. Not only do you need to watch your back (as always) with HMRC but forcing staff to go down the "self employed" route, or taking advantage of your genuine self employed workers could come back to hit you where it hurts !

We have extensive experience in advising on employment status issues, including defending against HMRC challenges, so please contact Optimum PAYE if you want to chat around any of these issues for your organisation.

 

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