Large UK firms suspected of underpaying £1.4bn in employment taxes

Data published by HMRC showed that “employment issues” accounted for nearly £1.4bn of ‘tax under consideration’ – an estimate used by government officials to focus on the most significant tax risks associated with the UK’s largest businesses. Penny Simmons of Pinsent Masons said the figure suggested that HMRC is likely to be concerned 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.

These so-called ‘hidden employees’ include workers who are paid by businesses on a self-employed basis, as well as those who are paid through a personal service company (PSC) and fall within the tax rules for off-payroll workers – known as IR35 rules. The government changed IR35 rules in April 2021, imposing 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.

Simmons said the new figures for tax under consideration suggested that officials believe that many large businesses are still not applying the IR35 rules correctly. She added that HMRC might also be 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.

Simmons said: “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. 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.”

She added: “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, whilst also having a process for making comprehensive employment tax status determinations for all workers to be paid on a self-employed basis.”

Steven Porter of Pinsent Masons said that businesses who engage large numbers of contractors – either through PSCs or as self-employed individuals – run the risk of HMRC investigations and potential penalties. In recent months, HMRC has levied penalties on businesses that have misapplied the IR35 rules, having given them 12 months’ grace period following the 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.