The UK’s tax authorities suspect large businesses of underpaying £1.4bn in employment taxes as they promise to crack down on ‘hidden employees’.
The use of self-employed workers that HMRC believes are really employees for tax purposes could be leading to some some large businesses underpaying Employers’ National Insurance contributions. This could include both workers who are paid by businesses on a self-employed basis and those who are paid through a personal service company (PSC) and fall within the IR35 rules.
HMRC recently won a tribunal case against Alan Parry, the former Sky Sports football commentator, regarding whether he should have been taxed as an employee under IR35. The tax bill was £356,000.
The government changed the rules for off-payroll workers in the private sector in April 2021. The new rules imposed tax and compliance risks on large and medium-sized businesses when engaging individuals through PSCs. Previously, the contractor was responsible for applying IR35 and paying any employment taxes that were due.
IR35 worker status decisions
HMRC is said to be pursuing £1.4bn in tax as of 31 March 2022.
Penny Simmons, a legal director at multinational law firm Pinsent Masons, told Personnel Today that HMRC still believed that many large businesses were continuing to pay contractors on a self-employed basis, when they should be employees for tax purposes.
This may be because HMRC considers that they are not applying the IR35 rules correctly, although this may also reflect that HMRC is increasingly questioning whether businesses should be paying individuals on a self-employed basis even when the IR35 rules don’t apply because the workers are not engaged through PSCs.
The test for determining whether an individual is an employee for tax purposes is complicated and can be difficult to apply, creating an additional and unwelcome layer of complexity for businesses, said Pinsent Masons. There is no single test – rather a business needs to consider a number of factors. Undoubtedly, this means that in some cases, even when a business believes that it has applied the test correctly, HMRC may still disagree with the tax status determination.
Even businesses that have sought to comply with the IR35 rules are finding themselves in the crosshairs” – Steven Porter, Pinsent Masons partner
Simmons said: “Large businesses need to review how they engage off-payroll workers and manage employment tax risks. Businesses should ensure they have robust on-boarding procedures in place and are applying the IR35 rules correctly, while also having a process for making comprehensive employment tax status determinations for all workers to be paid on a self-employed basis.
Steven Porter, a partner at Pinsent Masons said that businesses that engaged large numbers of contractors (either through PSCs or as self-employed individuals) ran the risk of HMRC investigations and potential penalties. In recent months, HMRC has begun to levy penalties on businesses that have misapplied the IR35 rules having given them 12 months’ grace period following the IR35 rule changes.
Porter added: “Off-payroll workers are one of HMRC’s biggest priorities at the moment – even businesses that have sought to comply with the IR35 rules are finding themselves in the crosshairs.”
“HMRC believes it may be missing out on more than a billion pounds a year from large businesses that are paying workers on a self-employed basis. Figures on that scale will push off-payroll workers to the front of the queue when it comes to HMRC opening investigations.”
In May, the parliamentary public accounts committee said that organisations did not always have the information they needed to make accurate worker status decisions under IR35 requirements and it was too difficult for workers to challenge decisions they feel are incorrect.