Crackdown on 'disguised self-employment' behind increased HMRC payroll tax take, says expert

Out-Law News | 04 Apr 2017 | 5:00 pm | 2 min. read

HM Revenue and Customs (HMRC) collected an additional £705 million in tax from investigations into companies' payroll taxes last year, almost half of which was collected from small or medium-sized businesses (SMEs), according to new figures.

The breakdown could indicate "a disproportionate allocation of resources by HMRC against smaller employers", who were more likely to take on casual labour than larger businesses and often lacked access to professional guidance, according to Paul Noble, a tax expert at Pinsent Masons, the law firm behind, which obtained the figures.

HMRC has increasingly been cracking down on the use of disguised self-employment through 'umbrella' companies, and possible abuses by intermediary labour provider businesses, Noble said. The clampdown has also focused on the sports and entertainment industries, in particular the alleged use of offshore companies to underpay tax on earnings through 'image rights' by Premier League clubs and footballers.

Some of the additional tax take would also relate to errors and simple mistakes, given the complexity of the employer compliance tax system, Noble said.

"Payroll tax remains a focus area for HMRC, and it is unlikely that they will take the spotlight off any time soon," Noble said.

"HMRC has been working to restrict umbrella companies, and we may see the amount of additional revenue begin to fall whilst it refocuses resources to target other areas of perceived avoidance and non-compliance. Businesses of all sizes need to be careful to keep their tax affairs in order so as to avoid any investigations, and also seek advice where necessary," he said.

Altogether, HMRC collected an additional £705m in tax that would otherwise have gone unpaid over the year ending 31 March 2016. The figure incorporates £322m collected by the 'wealthy and mid-sized business compliance' and 'individuals and small business directorate' for employer compliance failures; and £383m collected by HMRC's Large Business Directorate for employer duty failures.

New legislation came into force in April 2016 requiring workers employed by umbrella companies to be treated as employed by the company that engaged them, and to treat each location they work at as their normal workplace. The change restricted the potential for abuse of the travel and subsistence reliefs currently available to contract workers by those employed through umbrella companies, and the companies that employ them.

The term 'umbrella company' describes an arrangement under which contract workers are supplied to an employer business, and the business invoiced for the work that those workers undertake. The workers are then paid as employees or self-employed. Although many of these umbrella companies operate legitimately, those viewed as abusive by HMRC have been known to pay contractors the minimum wage and then supplement each individual's income, significantly reducing the amount of payroll tax collected by HMRC, according to Noble.

This week, the Treasury announced that dedicated technical experts from HMRC would visit all English Premier League, Championship and Scottish Premier League clubs over the next three years to review compliance risks, including those relating to payments in respect of players' image rights. In 1997, a tribunal ruled that income from a sportsperson's image rights could be treated as a separate income stream to income from playing the sport.

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