Figures show that HMRC's focus on the 'gig economy' and its clampdown on businesses which wrongly categorise workers as self-employed is bearing fruit, warns Pinsent Mason’s Paul Noble.
HMRC recovered an additional £819m from investigations into payroll taxes in 2016/17, up by 16% from the previous year, according to figures we have recently obtained. Additional tax collected following payroll tax investigations into large businesses showed an even more striking increase, yielding £503m, up 31% from the £383m collected in 2015/16.
The tax rules around employment status are complex and difficult to apply, with lots of grey areas, so it is not surprising that this is an area where employers often make mistakes. The potential NIC savings if workers and contractors are categorised as self employed also means there is a considerable financial incentive for employers to try to get their workforce on the self employed side of the line.
It is not just status issues though: expense payments, employee benefits and termination payments are all likely to be looked at closely. HMRC is combing carefully through the minor details of payroll with even the most trivial of expenses now being investigated.
Taylor Review, IR35 and Statutory Status Test
HMRC's focus on payroll taxes is only likely to continue. The government is currently considering whether to introduce a statutory test of employment status for tax purposes, in response to the Taylor review of modern working practices. Although any simplification in the rules will be welcomed by employers, the chances are that whatever test they come up with will bring more people within the PAYE net. If the government does decide to change the test for tax purposes, it is not clear whether or how this would apply in relation to existing employees. It could cause havoc in some sectors if employers have to reassess the status of all their existing staff based on new tests.
In 2017 new rules were introduced for the public sector where individuals are engaged through personal service companies, but would be regarded as employees, rather than as self employed if engaged directly. These rules push the obligation to deduct tax onto public sector engagers, rather than the responsibility falling on the service company under the so called IR35 rules. The government has said it is considering extending these rules to the private sector. If it decides to do so, this will impose a significant burden on employers who use temporary labour, not just in terms of higher PAYE costs but also the administration and management time required in working out employment status.
Implications for Businesses
The new corporate criminal offence of failing to prevent the facilitation of tax evasion is also focusing the minds of corporates onto payroll tax issues, with many groups identifying the employment status of their contractors and subcontractors as a potential risk area. Putting in appropriate policies and procedures should give the business a defence to a criminal charge, if one of its employees or associated persons criminally facilitates tax evasion, perhaps by deliberately misrepresenting that an individual is self employed.
HMRC's continuing focus on payroll taxes and the changes in law which may be coming down the line mean that employers need to ensure that their HR and payroll departments are fully up to speed with the current rules and are aware of the consequences and timescales of forthcoming changes in law.
Paul Noble is Head of Tax Investigations at Pinsent Masons, and may be contacted as follows:
(T) +44 (0)20 7418 8217