Getting caught on the receiving end of an employment status challenge from HMRC is a nasty business, and it’s going to keep happening at an increasing rate. UCATT is reporting that false self-employment is continuing to rise in the construction industry, despite some targeted tightening of the rules. Even with those new restrictions in place, the number or construction workers operating through CIS has risen by 7% in the last 2 years.
With false self-employment being reported to cost the government close to £2 billion per year, it’s no wonder HMRC is starting to look a little more closely at intermediaries, from agencies to umbrella companies. More than ever, if you’re putting people to work through an intermediary, you need to be sure their employment status is being reported correctly. The protections you might be used to against status challenges are being stripped away, and even an honest mistake could turn out to be costly.
What Qualifies as “False Self Employment”?
It all boils down to the question of what actually qualifies as “false” self-employment. Right now around 1.5 million people are working either through agencies or Personal Service Companies in the UK. In the construction industry, the CIS scheme exists to clamp down on tax evasion, but HMRC still feels that it’s open to exploitation.
In effect, workers operating through intermediaries are at risk of being treated as self-employed when PAYE and tax should be operated. By classing the workers as self-employed when they are not, a less-than-scrupulous intermediary will ducks its employer NIC obligations.
Why Is There So Much Confusion Around False Self Employment?
Getting caught with an HMRC status challenge needn’t be as a result of a deliberate deception on the part of the end employer. The rules around self-employment through intermediaries aren’t well understood, or even interpreted consistently.
A lot of the confusion seems to centre around the issue of “supervision, direction and control” (SDC). Simply put, for workers operating through an intermediary to be considered self-employed, they have to be in complete charge of how they work. If anyone’s capable of exerting any kind of controlling influence, there’s a problem (leading to a possible status challenge).
Then, of course, you’ve got Personal Service Companies. On the face of it, it’s not difficult to see why HMRC is suspicious of these. A company set up by someone specifically to sell their own services seems almost tailor-made for false self-employment, so it’s not surprising that the taxman has them firmly in his sights. As with other types of intermediary, the closer HMRC looks, the more likely it is that honest mistakes and misunderstandings are going to trip people up.
How Can I Make Sure My Workers Are Correctly Classified?
All in all, tighter scrutiny and harsh penalties are creating an inhospitable climate for employment intermediaries in construction. If you engage workers, you need to be paying close attention to the way you’re accounting for tax and national insurance – because you can be sure HMRC is doing the same. The regulations are very broad, and we’re only beginning to see the shape they’ll take once their limits are tested.
In practical terms, the best advice for now is to stay alert – and seriously consider engaging your workforce directly if you want to stay safe. If you aren’t using intermediaries, then the agency legislation should not hit you and you can steer clear of some of the messier aspects of SDC. If you’re using self-employed workers at all, you need to make sure your practices are absolutely bulletproof to withstand an HMRC status challenge.
Kye Burchmore of RIFT Legal says,
“HMRC updated their guidance recently and it is difficult to see how CIS intermediaries will have much of a roll to play in the future. Once HMRC have successfully targeted a few companies under S44 ITEPA I believe the walls will start closing in on intermediaries and most will evolve to become nothing more than simply a payroll business rather than a means of offering any protection against employment status challenges.”
Most importantly, get good advice if you’ve got any doubts about where you stand.
How Can RIFT Legal Help Me?
With our expertise and 25 years of experience in construction, RIFT Legal is in the perfect position to help. We can carry out a full audit of the way you engage people, and fight your corner with HMRC if you get hit with a challenge. We’ll even pay your liabilities to HMRC if anything goes wrong (and there’s no reason why it should).
Whatever questions you have about RIFT or the HMRC crackdown, be sure to get in touch. You can reach us by phone or email, and a quick chat now could make all the difference when the taxman knocks.