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HMRC suspects large businesses have underpaid over £1.4bn in employment taxes as it attempts to crack down on ‘hidden employees’ and plug the sizable gap in government finances.
These ‘hidden employees’ are self-employed workers that HMRC believes are not included on the payroll purely for tax reasons. Businesses can pay less Employers’ National Insurance contributions (NIC) by either paying employees on a self-employed basis or through a Personal Service Company (PSC).
The IR35 rules imposed in April 2021 meant the responsibility for applying tax rules transferred from the contractor to their employer. This meant tax and compliance risks for off-payroll workers fell on large and medium-sized businesses, who now had to decide the employment status of their workers.
A campaign against IR35 garnered cross party support and Liz Truss’ short-lived Government had even proposed scrapping these new rules that had made employers partly responsible for the avoidance of NIC. However, the decision to scrap IR35 was itself cancelled by the country’s fourth chancellor of 2022, Jeremy Hunt.
So we are back where we started, with HMRC launching a large number of IR35 investigations and pushing those as far as it takes through the tribunal system. In May 2022, HMRC won a case against Talksport radio presenter Paul Hawksbee who was ordered to pay £140,000. The Court found that as Hawksbee was providing his services through his limited company, he was considered a disguised employee and should have been subject to the taxes of a PAYE employee.
The test to determine if an individual should be regarded as a PAYE employee or a self-employed contractor is a complex one and requires that businesses assess all the information available, not just the facts of the contractor’s engagement with the business. This is a particularly onerous task as it requires businesses to consider if they have collected ‘sufficient information’, amongst other things.
The risk is even more pronounced for businesses that engage large numbers of contractors, through a PSC or as a self-employed individual. Recently, HMRC has begun to levy penalties on businesses that have misapplied the IR35 rules having previously provided a 12-month grace period following the rule changes.
Given that the test for determining an individual’s tax status is so complex and subjective, businesses would be wise to do all they can to mitigate the impact of an investigation. Failure to do so could have serious implications for their business.
To fully support you, we have a dedicated team of Tax Disputes and Risk Management specialists who have significant experience in handling precisely these types of HMRC investigations. We will provide an impartial and clear way through, keeping you one step ahead.
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