The taxman cometh - don't get caught in the 'false self employment' trap

When is a freelancer or agency staffer really an employee? Your answer could cost you a lot if money if HMRC doesn't agree, says tax expert Alastair Kendrick.

Last Updated: 10 Jun 2016

Back in the days before I was a tax accountant, I worked as a government tax inspector. Recently, I learn from former colleagues that HMRC is stepping up its investigations into workers who are engaged ‘off payroll’.

The reason is simple: tax officials are on the hunt for significant amounts of underpaid income tax and class 1 National Insurance (that paid by employees earning more than £155 a week, and under state pension age), together with interest and penalties among the large population of agency and ‘freelance’ workers.

Their targets include people who have set up their own companies (known as Personal Services Companies), but because of the nature of their working relationships would be considered ‘employed.’ It’s this employer who is then deemed ultimately responsible for their direction, supervision or control. In other words, these workers might claim to be running their own businesses, but they are self-employed in name only.

In this country as many one and half million people toil away ‘off payroll’ supplying their services as contractors, either under personal service companies, or via employment agencies. They do this in some of our biggest sectors including IT, construction, road haulage, and the media. The NHS is another heavy user, and so are schools using agency supply teachers.

For one unhappy supply teacher, her agency wouldn’t engage her directly and told her to work via an umbrella company. On behalf of the umbrella company, the teacher ended up stumping up the employer’s national insurance contribution, leaving her take home pay at less than 50% of her gross wage.  An outrageous rake-off.

Personally, I have come across many agencies in the haulage sector who insist all their workers are engaged via their own personal service companies.  These workers don’t want the aggravation of running a company so rely on a third-party provider to handle it for them, but again at a considerable cost. What’s more, this type of arrangement would almost certainly fall foul of HMRC’s tighter managed service company rules anyway.

It doesn’t help that the rules concerning self-employed labour can be murky (even for seasoned tax advisers) and are – to some degree – open to interpretation. Just this April, the ending of travel and subsistence payments started to cause serious problems for construction industry workers.

After the clampdown on false self -employment, many were moved into umbrella arrangements. For construction workers whose contracts involve direction, supervision and control, being unable to claim these expenses are now leaving many out of pocket.

Neither are tax rule static - they are repeatedly and regularly reinterpreted each time judgments are reached after HMRC legal challenges. This happened recently when the taxman successfully challenged a personal service company under Managed Service Company rules, with the tribunal ruling the company faced a liability. We understand more such cases are to follow.

And here’s the rub. Following the Demibourne Limited v HMRC 2005 ruling, any potential reduction in taxes collected leaves the liability with the engager (or the end client). In other words, if you use agency workers or freelancers via personal service companies, it could be your business left footing the bill for missed income tax together with National Insurance and interest payments.

It doesn’t stop there. If your company is found to have breached employment laws, it could also be penalized and face a significant liability if the worker concerned should have been considered an ‘employed worker.’

With tax rule changes potentially in the offing from test cases, and the taxman’s hand strengthened by recent tribunal victories, I would advise those of you who engage workers off payroll to look closely at your risk exposure and seek clarification from a tax expert in case you might inadvertently be storing up trouble for the future.

Alastair Kendrick is tax director at MHA MacIntyre Hudson

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