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Are SME’s in the firing line?

Sam Beattie Sam Beattie

A recent disclosure from HMRC has confirmed that HMRC’s compliance activity in 2015/16 boosted the Treasury’s coffers by an extra £705 million of PAYE and NIC.

Some SME’s have suspected for years that they have been at the sharp-end of HMRC’s attention when compared to big business, and the details within this report may go some way to supporting that view. Of the £705m total, £322m (45%) of the yield was collected from SME’s with the remaining £383m from large employers.

While HMRC can (and should) be pleased with the results of their actions, prudent Employers should expect HMRC’s focus to remain in this area.

Much of the Revenue’s success had been achieved by challenging the employment status of workers.  Where HMRC determine that workers have been incorrectly treated as contractors; or as having self-employed status; or off-payroll worker status, any shortfall in tax will usually fall in the first instance on the employer.

The growth of the Gig Economy (the part of the labour market with a prevalence of short-term contracts or freelance work, as opposed to permanent jobs) has become newsworthy following some high profile legal cases over the individual’s rights and legal protection for Gig Economy workers. It is therefore no surprise that the tax treatment of payments to those individuals is also in the spotlight.

The chair of the parliamentary Work and Pensions Committee has recently stated that the government must “close the loopholes that are currently being exploited by these companies as part of a wide ranging reform to the regulation of corporate behaviour” which they go on to say is “potentially creating an extra burden on the welfare state”. The committee also comments that an assumption of worker status by default would protect individuals and the public purse.  

Off-payroll workers will likely fall into the categories of agency workers; personal service companies; or individuals, and HMRC are likely to challenge any blanket status treatment of off-payroll workers on principle.

In most cases individuals will have paid income tax on their earnings, and it is therefore the recovery of national insurance which attracts much of HMRC’s attention.

How employers address both the PAYE and NIC risks and the legal entitlements of employees could be crucial determining the outcome of a compliance review from HMRC. Critical to any defence of an off-payroll worker/contractor status will be evidence of how the business or organisation arrived at the decision, when it was reviewed and the individual factors involved.

HMRC have provided on-line status indicators which provide some comfort based on individual circumstance, these include: right to refuse work or mutuality of obligation; control, who directs the work; type of engagement and duration; rate of pay; right of substitution/exclusivity; how work is paid; financial risk and opportunity to profit; provision of equipment/information/ tools/facilities and insurance/indemnity.

The onus is very much on the employer to get the employment status right. Whilst there may be a preference to engage contractors in lieu of employed workers, the potential of a prolonged dispute with HMRC makes that option less attractive.