Out-Law News 3 min. read

Crackdown on 'bogus' self-employment could increase tax take and protect workers, says CAB

Strengthening the rights of an estimated 460,000 UK individuals in 'bogus' self-employment would also lead to substantial economic benefits by increasing the amount paid in income tax and National Insurance contributions (NICs), a leading consumer charity has said.

Three quarters of those who contact the UK's Citizens Advice Bureau (CAB) for advice in relation to self-employment are happy with their status, CAB said in a new report (23-page / 660KB PDF). However, an increasing number of its clients were not sure about their employment status and could be losing out on the legal protections that come with employee status as a result, it said.

"We have seen a steady increase in the number of people visiting our advisers to determine whether or not they are self-employed," CAB said in its report. "This appears to be a growing but mostly hidden problem."

"Tackling bogus self-employment will help the government by ensuring it receives the tax and National Insurance it is due; it will help responsible businesses who are undercut by rivals; and it will ensure that workers get the basic protections they are legally entitled to, such as the National Minimum Wage and holiday pay," CAB said.

CAB surveyed almost 500 of its self-employed clients and found that one in 10 of them were likely to meet the legal tests for employment status. These people had at least three 'markers' suggesting that their self-employment was not genuine, matching the tests used in the employment status indicator (ESI) tool published by HM Revenue and Customs (HMRC). This corresponded to 460,000 people nationwide, CAB said.

Each individual in 'bogus' self-employment could be losing an average of £1,288 a year in holiday pay and were paying an extra £61 per year in National Insurance that they would not have to pay if they were classed as employed, according to the report. The UK exchequer loses an average of £300 per person who is wrongly categorised as self-employed, while "responsible" businesses face a competitive disadvantage when compared to those that categorise their workers as self-employed, CAB said.

Self-employment is not currently defined by UK law and can only be determined by a judge in an event of a dispute. Separate tests are used for tax purposes, and for the purposes of deciding whether a worker must legally be automatically enrolled into a suitable workplace pension scheme. Factors taken into account by HMRC include whether the worker has control over work performed and when, whether workers must provide their own equipment and whether the worker has the right to send somebody else to do the work.

Employment law expert Stuart Neilson of Pinsent Masons, the law firm behind Out-Law.com, said that although aspects of the law in relation to self-employment were uncertain, any action taken by the government to provide clarity in relation to the rules would have to take into account the reality of modern-day working.

"Over the last few years in particular, the way in which businesses have been engaging with the workforce has changed with both companies and individuals showing an increased appetite for more flexible arrangements - with the increased popularity of so-called zero-hours contracts providing the most obvious example," he said. "As reports like CAB's, and HMRC's ongoing review of the tax treatment of contractors, show, it can be difficult for the law to keep up with the changes."

"While there are undoubtedly some sectors of the economy where, as this report suggests, unscrupulous businesses are using self-employed status to avoid giving workers the protections of full employment status, equally, there are others where it suits individuals to be self-employed - whether for tax reasons, or because they want more flexible working patterns or the ability to work for multiple employers. Any changes to the law must recognise that both sides can benefit from flexible models of working. A rigid, 'one size fits all' set of rules, would benefit neither," he said.

HMRC is currently consulting on the effectiveness of legislation designed to catch disguised employment, known as IR35. It is seeking views in order to "better understand the issues and explore options for reform"; with one of the suggestions being to place more of a duty on the companies that engage contractors and freelancers to check their employment status.

Employment tax expert Chris Thomas of Pinsent Masons said that HMRC would "certainly agree" that there was a need for reform of the rules. In its discussion document, the tax authority estimated that non-compliance with the IR35 rules would cost the exchequer £430 million in lost revenue this year alone, he said.

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