The Revenue says it suspects many large businesses are underpaying more than a billion pounds in employment taxes. Data published by HMRC indicates that a number of firms are underpaying employers’ National Insurance contributions by classifying some of their workers as self-employed when they should be employees for tax purposes. They estimate the total underpayment is around £1.4bn. The Revenue has promised to crack down on so-called ‘hidden employees’. We’ll consider that.
Personnel Today reports on this quotes Pinsent Masons tax specialist Penny Simmons. She says ‘HMRC still believes that many large businesses were continuing to pay contractors on a self-employed basis, when they should be employees for tax purposes.’ She says: ‘Simmons said: “Large businesses need to review how they engage off-payroll workers and manage employment tax risks.’
Steven Porter is also quoted – he’s Head of Tax Disputes and Investigations. He says: ‘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 by which he means they run the risk of an HMRC investigation.
So, let’s get a view on all of that. Earlier Penny Simmons joined me by video-link to discuss it. I started by asking what she means by ‘hidden employees’:
Penny Simmons: “Well, not in the literal sense, they're not actually hidden! When I refer to hidden employees, what we are talking about is employees who look like they are not employees for tax purposes - I know I say this a lot - but they look like they are independent contractors and they therefore shouldn't need to be taxed as though their employees so taxed through the PAYE, the pay-as-you-earn system and they shouldn't be subject to employers’ and employees’ National Insurance Contributions but, actually, they really should and so we're calling them ‘hidden employees’ because they may not be taxed as employees but, in reality, according to the UK tax rules, they should be taxed as employees.”
Joe Glavina: “You say businesses should ensure they have robust on-boarding procedures in place. What do you mean by that?”
Penny Simmons: “Okay, so on-boarding procedures. When you are taking on somebody off-payroll, you need to do some due diligence, you need to do some checks before you take them on and the key point with IR35 - it's the key point that I talk to businesses about all of the time - is you can't have an IR35 compliance process in place if you can't identify when you engage with somebody through a personal service company, so when IR35 might actually become a risk for your business. So, the first thing you need to do is to make sure that you have those on-boarding processes in place so that you can identify are we about to do business with? Are we about to engage an individual who's operating through a personal service company and will want us to pay their personal service company? Or are we working with an agency who's supplying us an individual through a personal service company who is going to provide services to us? Put quite simply, what you need to do for the rules, the first port of call for a business is, you need to work out would that individual be an employee for tax purposes if they had engaged directly and not through their personal service company? Well you can’t do that, you can’t comply with the rules, if you can’t identify if you are engaging with a personal service company. So that would be the first of those robust on-boarding processes that you need to make sure you have in place. Once you have a process in place to identify when you're going to engage with an individual through a personal service company, then you need to make sure that you've got processes in place to make those status determinations, to make those determinations to work out, would that individual be an employee for tax purposes if they engage directly with the business and not through their personal service company? Joe, we talked about this before, but that involves applying the test for employment status as the current tests are set out in in the UK law, but there's no set test, it’s based on a number of factors and the UK Revenue certainly encourages, and advises, businesses to use its CEST tool, its check employment status for tax tool which, yes, we know is not perfect, but it's certainly the tool that the Revenue are encouraging businesses to use. So that also needs to form part of this on-boarding process. So, work out are you engaging with somebody through a personal service company and then undertake those status determinations to work out if that person should be taxed as an employee? Are they inside IR35 or are they outside IR35 and can the business continue to simply pay their personal service company on a non-employee tax basis?”
Joe Glavina: “Steven Porter says businesses who engage large numbers of contractors run the risk of HMRC investigations and potential penalties. Is that the case even if they have been fully compliant in the past?
Penny Simmons: “So this isn’t, I guess, an answer that businesses want to hear but it is absolutely likely, it is absolutely possible. With tax risk compliance rules such as iIR35 the Revenue would be expecting a business to monitor its compliance. So it's not good enough to say, well I made status determinations for individuals engaged through PSCs back in, I don't know, 2019, 2020, in preparation for the new rules and now I'm going to not review those status determinations, but I was fully compliant then. The Revenue expects businesses to do this in relation to a whole host of tax compliance and tax risk issues - to monitor and review its compliance with the IR35 rules and in fact the Revenue’s guidance says as such. So, that's going to involve things like updating those status determinations, checking has anything changed in relation to the to an individual's engagement with the business, but also it’s that stress-test, that check that actually the processes that you introduced back in 2019, 2020, in preparation for the new IR35 rules, it’s checking that they're still fit for purpose, that they are still operating as intended and, also, that they've taken on board the fact that the Revenue’s guidance, in many respects, has moved. Market practice may well have moved, the way we engage with contractors and the way contractors are responding to businesses’ requests has changed. So it is always - and I can't really stress this enough - it is always important that a business monitors and reviews its tax processes, its tax risk processes. So, it's never enough to say, well, I did it when something was introduced, but I haven't looked at it in years. A business will always need to be checking that its processes are still effective, they're still robust, they are still working as intended in order to make sure that they are not vulnerable to the risk of an HMRC inquiry.”
Penny and Steven covers all of those points in more detail in their Out-Law article: ‘Large UK firms suspected of underpaying £1.4bn in employment taxes.’ We have put a link to that in the transcript of this programme.
- Link to Out-Law article: ‘Large UK firms suspected of underpaying £1.4bn in employment taxes’