We believe that some further education is needed this month around the tax risks of paying certain workers as self employed as the message is clearly not getting through to many employers out there judging by what we hear and see on our travels. HMRC's focus on "false" self employments also continues to increase so it is absolutely crucial for employers to get this area right to avoid very costly settlements.

So, as a follow-up to our previous articles on employment status, we focus this time on the main risk areas where most mistakes are made by employers that are then wide open to HMRC challenge.

 

Current Employees

We are seeing an increasing number of employers looking to move full-time employees onto self employment terms, for no other reason other than to reduce staff costs.

This is extremely high risk - in other words, it simply does not work in most cases.

To roll out HMRC's mantra, employment status is not a matter of choice. If nothing much else has changed in how the work is done, other than the worker being paid gross instead of under PAYE deductions and a new contract has been issued (see comment on contracts below), then HMRC will almost always be able to successfully challenge that the role is still an employed role for tax and NI purposes. In our experience, the following arguments are often used by HMRC in such situations:

  • The worker is still under a high level of control by the employing organisation, e.g. still strict hours of work, still working within lines of management (possibly with some management responsibilities), still under all other rules of regular employees, etc
  • The worker is not running a bona fide business, i.e. as he is working only for one organisation with no risks attached
  • The worker is still highly integrated within the organisation, i.e. he is seen to many both inside and outside to be an employee
  • The role fell within PAYE laws previously, and most other work of this nature across the UK is also within PAYE, so allowing self employed tax laws to apply in this case would be inconsistent with the law and practice and HMRC's own commitment to fairness for all taxpayers.

Even if there is a clear business rationale behind such a change, this is highly unlikely to have any bearing on the tax position of the worker. They are either employed or self employed based on facts.

As we have said before, the payment of ex employees is the first port of call for HMRC when reviewing gross payments in any employer compliance review and therefore the chance of HMRC identifying blatant errors around this is extremely high.

 

Redundancies

In a similar vein, many employers are falling into the trap of assuming it is okay to make a PAYE employee redundant and then rehire them as a self employed worker. It usually isn't, far from it.

The same arguments outlined above are usually highly relevant when considering the tax position of an ex employee returning after redundancy. The fact that they have been made redundant does not change anything in terms of deciding whether there is an employer/employee relationship going forward.

If the worker comes back to do more or less what he was doing before as a full-time employee, albeit on slightly different terms and perhaps in a reduced capacity (because the company can't afford to pay him full-time) then it will still be very difficult (impossible in many cases) to convince HMRC and the courts that the worker is genuinely self employed for tax purposes.

In such situations, there is also a high risk that any previous tax-free redundancy payments made to the worker could be challenged by HMRC as being illegal if there has been no genuine redundancy. In such cases, HMRC will seek to collect the tax and NI that should have been paid on the incorrect redundancy payment from the employer as well as interest and penalties for getting it wrong. This is on top of all the employment law issues as to whether the employer has complied with the laws in making the worker redundant in the first place.

Basically for a redundancy to be genuine, the job that the employee does must disappear, ie the business can still take on new staff but not to do the work the redundant employee was doing.

Again, linking up redundancy payments to gross payments to self employed workers is usually at the top of HMRC's checklist when reviewing an employer's records so any errors around this are very likely to be spotted - and challenged.

 

Regular Work

The risk of an HMRC challenge into the employment status of a worker increases the more regular the work becomes. Where a worker is performing services for one organisation most days or weeks, the case for self employment becomes much weaker particularly around the issues of mutual obligations, exclusivity, control and whether the worker is running a genuine business, all of which are hugely important in deciding the tax position.

Many businesses have long standing arrangements with self employed workers, many of which are virtually full-time positions and such arrangements will ALWAYS come under close scrutiny by HMRC and challenged as being "false" self employments.

 

Part-time or Short Term Work

We are often told that a worker is being paid as self employed because the employer can't afford to pay them full-time or that it's only for a "few hours a week".

From a tax point of view this doesn't matter. It is the nature of the work, and how this is done, that dictates whether the worker is an employee or self employed, not how long he is doing the job for each day/week or how long the project lasts for.

If a worker is only 'on the books' for a very short period and the payments made are minimal then HMRC may turn a blind eye. However, where the payments are regular, we would expect HMRC to identify this and the employer would need to have a much more robust argument for self employment than low hours to be in with at least a chance of defending the gross payments.

 

Over Reliance on Contract

This still remains THE most common mistake amongst employers (although moving existing employees onto self employment is catching it up fast at the moment).

The number of engagements we come across where the contract spells out self employment loud and clear but the reality is the complete opposite is beyond belief.

We cannot say this often enough - there is no such thing as an "HMRC proof" contract or a contract that "guarantees" self employed tax status ! A contract covering the working arrangements of a self employed worker is of course an essential document from a legal point of view to cover both parties but from a tax point of view, a contract is only valid if it mirrors what happens in practice. If the contract is nothing but a 'sham' to avoid PAYE then HMRC will simply ignore the terms of a contract when looking at the nature of the work being done and the relationship between both parties in deciding the employment status of the worker.

Employers who think they are sitting pretty because they have "good" contracts for their self employed workers really do need a wake-up call if that is all they are relying on if HMRC come calling. Where the actual working arrangements are blatantly employer/employee then the contract will be of no help whatsoever.

 

Conclusion

Deciding employment status is tricky at the best of times and is often unclear even to professionals (and HMRC !!). However, mistakes made in the high risk areas we have identified above are usually easy to identify by HMRC and a challenge to the self employed status in such circumstances is notoriously difficult to defend.

We have said before that where HMRC are successful in ruling an employer/employee relationship exists, and that gross payments have been made incorrectly. it is the employer who has to settle all unpaid PAYE, employer NI, employee NI, interest and penalties and it is not uncommon for such settlements to be huge especially if a few years worth of payments are in question.

It is vitally important that all employers wake up to the fact that they cannot pay workers gross 'willy-nilly' or "just because" and that failure to get the tax position right could be disastrous further down the line.

As ever, any employer paying workers gross in any of the described high risk areas would be best advised to get in touch for a chat.

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