If you engage individuals on a self-employed basis, you are exposed to the risk of a legal challenge by HMRC. HMRC doesn’t just have the motivation to make employment status challenges – it has recently
acquired the tools needed to successfully challenge the classification of self-employed workers in ways it was unable to do before.
HMRC created an additional 1,000 key caseworker posts this summer and launched an employment status and intermediaries team to boost its compliance focus.It has also published guidance explicitly demonstrating where construction companies could find themselves classified as agencies – and thus as employers for income tax purposes – under the 2014 legislation changes.
A spokesman for HMRC told us: “HMRC is currently transforming its compliance approach with the creation of a new employment status and intermediaries team to focus on status and employment intermediary risks.This dedicated resource will allow HMRC to better focus its resources and expertise to ensure these issues are effectively tackled.”
What does the legislation update mean?
The main weapon in HMRC’s arsenal is the new wording of Section 44 of the Income Tax (Earning and Pensions) Act 2003. Amendments made in 2014 broadened the definition of agency employment.
The new wording effectively says a worker is employed by an agency if his or her services are carried out due to a contract between a client and a third party.
One exception would be if the firm could prove it had no right to direct, supervise or control the manner in which the workers it used provided the service – but this could be difficult to establish in practice and leaves a significant risk in the absence of a precedent.
You may feel the individuals are genuinely self-employed but this is not always easy to prove. HMRC challenges can cause major damage to businesses, in terms of time, cost and reputation. If subject to a challenge, HMRC will interview you, the workers and your clients and quote case law to support their position.
If you are not able to successfully argue your case at the tax tribunals you will end up with substantial liabilities. This normally results in the closure of the business and in some cases HMRC will aim to show negligence and try to push the liability onto the directors personally.
RIFT Legal Services can support you in assessing and responding to the risk by analysing your business and ensuring you have the best defence possible to any HMRC challenge.
Why is there a goverment focus on “false employment” now?
The volume of people declaring themselves as their own boss has soared since the beginning of the economic downturn.
In fact, as recently as November 2010, David Cameron urged “more people to make a job rather than take a job” as he launched a week of events across the country for Global Entrepreneurship Week to encourage people to become self-employed. At the same time, the then business secretary Vince Cable expressed his support for the focus on self-employment and small business creation, pledging to tackle “onerous regulations and taxes” to encourage entrepreneurial activity that he said generated economic growth and jobs.
It seems to have worked – but maybe not in the way they intended. Data released by the Office for National Statistics this summer showed that 4.7m people were classified as self-employed across the UK in the first quarter of 2016. This was up by more than 20 per cent from the third quarter of 2008. This has happened in parallel with a spike in government budget deficits and the strict austerity movement led by then chancellor George Osborne. Former Labour chief secretary to the Treasury Liam Byrne’s famous note that there was “no money” when he left in 2010 summed up the desperate situation.
If the government converts one in 10 self-employed workers to employee status, and if these were earning just £500 per week each, it would receive an extra £1.5bn per year in employer national insurance contributions alone.There would be benefits in employee national insurance and income tax payments on top. And that’s before backdated claims.
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How does this related to the employment law issues in the news?
As well as much needed cash, there is another political motivation: worker rights. The self-employed generally aren’t covered by employment law, although they retain safety protection and in some cases can bring discrimination cases. Employees, on the other hand, are entitled to the national minimum wage, annual leave, sick pay, maternity pay, the right to request flexible working and more.
Trade unions and other workers’ rights groups are actively pursuing a conversion of more people to employment status. This drive has intensified with the growth of the gig economy, which sees people make a living from various short-term assignments and has created a media buzz.
A 2016 employment tribunal decision that classified two people earning money driving for taxi firm Uber as employees was covered across the national media.
Leigh Day employment lawyer Annie Powell, who worked on the case, said it produced a “ground-breaking” decision. “It will impact not just on the thousands of Uber drivers working in this country, but all workers in the so-called gig economy whose employers wrongly classify them as self-employed and deny them the rights to which they are entitled,” she added.
During the same period, the spotlight has been turned on working practices at delivery firm Hermes, while it emerged in October 2016 that 100 BBC presenters were being investigated by HMRC for historic practices.
All the publicity has not gone unnoticed at Westminster. Prime minister Theresa May has ordered a review of employment practices, to be written by the Royal Society for the Encouragement of Arts, Manufactures and Commerce chief executive Matthew Taylor. Writing in the Guardian in October, Mr Taylor said: “Around six million people are not covered by the standard suite of workplace rights. Worryingly, that number continues to grow, and it shows how rapidly changing business models and working practices are continually stretching the limits of our employment rules.”
Meanwhile, also in October, the Business, Energy and Industrial Strategy Committee launched an enquiry into the future world of work. The committee, chaired by Labour MP Iain Wright, said the review’s terms of reference would include: “What should be the status and rights of agency workers, casual workers and the self-employed … for the purposes of tax, benefits and employment law?”
Another Labour MP –and chair of the Work and Pensions Committee – Frank Field has become a parliamentary champion of employment status challenges, and has gained support from the Treasury and HMRC. Financial secretary to the Treasury Jane Ellison wrote to Mr Field in October saying the government took false self-employment “very seriously”.
The Office of Tax Simplification published a Focus paper in December 2016 intended to stimulate debate around issues of taxation with the rise of the ‘flexible workforce’ in the ‘gig’, ‘platform’ and ‘sharing’ economies. Ministers are “committed to taking strong action where companies, to reduce their costs, force their staff down routes which deny them the employment rights and benefits they are entitled to,” Ms Ellison warned. As this political movement gathers pace, construction looks increasingly vulnerable.
It is important to be aware that although many of these cases seem similar in the ways they are reported in the media there are actually many subtle differences between them and they rely on the complex relationships of several different pieces of legislation covering both taxation and employment law. It is important to ensure that your own situation has been independently reviewed to ensure that compliance with all relevant legislation has been assessed.
Is it only HMRC that can bring an employment status challenge?
As has been seen reported in the news employment status challenges do not have to originate with HMRC.
Workers can also make their own claims. An employee is entitled to statutory annual leave of 28 days – or 12.07 per cent of their salary. Claims can be backdated two years so a worker who earns £20,000 a year could claim £4,828. Although a worker would have to bring their own claim for such payouts, it is likely that a tribunal would find in their favour if the company has already lost a case to HMRC.
An alternative scenario could be that a trade union or other interest group takes on a claim on behalf of its members. This means the employer will have to either deal with larger cases or many individual ones, both of which will be costly in terms of time, money and reputation.
What exactly does RIFT Legal Services do for your business?
- Our expert tax team will firstly audit your existing employment structures.
- We then advise who can be classed as self-employed and who cannot.
- The next step is we will supply all the relevant contracts and paperwork to ensure that you are compliant.
- In the event of an HMRC enquiry, our legal team will deal with this on your behalf from start to finish.
- In the unlikely event that we are not able to defend our position, we will pay all liabilities.