Enquiries Into Employment Status

Gary Green
Gary Green
June 27, 2024

In some cases, employers find it in their best interests to have somebody work as a sub-contractor who is self-employed for them instead of hiring them as an actual employee. For employers, there can be significant financial savings if they do this, since there is no need for the employer to pay the National Insurance employer’s contributions when they pay someone who is self-employed. Furthermore, they do not have to pay that person if no work is available that they can do.

Employers do not need to pay such workers if they are sick, or away on holiday, and they do not have to consider any other benefits or payments that would typically be given to their own employees. Nevertheless, there are some disadvantages to taking this course of action too, since the individual may not always be available when their so-called employer needs work to be completed.

While this approach to employment may appear to only benefit the person who is doing the hiring, in fact, the person being treated as if they are a self-employed sub-contractor can experience some benefits too. Often, they are able to charge a larger amount for the work that they do since it still works out cheaper overall for the person who is using their services when compared with how much they would have to pay their own employee.

The tax that is due on payments needs to be paid to HMRC later than when it would be paid as an employee under PAYE, and they can claim some expenses against their income that may otherwise have been unavailable to employees. Also, the individual is able to take on work from any other source and can charge the amount they want for all work carried out. It is important that the individual understand the disadvantages, though.

For example, if they are sick they receive no payment. Usually, they need to obtain public liability insurance too, and they will have to keep their own records and books so their tax returns and accounts can be properly prepared, and that may mean hiring an accountant and paying for their services.

Across certain industries, it is fairly common for people to be classed as self-employed sub-contractors and no employees such as the IT sector and construction industry.

How Can Employment Status Be Determined?

One of the problems that arises when it comes to determining employment status is that it cannot be decided simply by the parties agreeing whether they want the individual to be either an employee or a self-employed sub-contractor. Rather, detailed facts in the case are used to determine the most appropriate employment status. While in theory an individual’s employment status will depend on their contract terms, HMRC often overlooks the contract when they think that the relationship in practice between the parties is not the same as that outlined in the contract terms.

In most cases, HMRC prefers people to have employee status, since National Insurance and tax are both handled under the traditional PAYE system. If HMRC decides to carry out tax investigations into a company, they typically check to find out whether any individuals working for the company are deemed to be self-employed sub-contractors and not employees.

It is quite complex to determine an individual’s employment status. Several factors must be borne in mind and typically there is not a single factor that can conclusively decide the matter.

 Is An Enquiry Into Employment Status Serious?

There are several reasons why companies should take an inquiry into their workers’ employment status very seriously, since often this type of inquiry starts as only part of a broader inquiry looking into corporation tax returns, and the investigation may get out of hand when handled incorrectly.

Often, retrospection of PAYE is sought by HMRC for the concerned workers, which, if there is no intervention from a tax investigation specialist, could end up with a significant financial settlement that could be large enough to cause financial problems for the company.

Any business engaging workers on a self-employed basis must be fully satisfied that they have correctly classified those workers and that HMRC would definitely not deem them to be company employees. For this reason, it could not be more important to use the services of a tax investigation specialist to ensure that any challenge to workers’ employment status is handled appropriately since they can limit any retrospection and work closely with HMRC to assist with recategorization of the workers’ status within the company if necessary.

Seeking Professional Help

The consequences of getting the employment status of your workers wrong can often be serious. If your company is paying a worker as a self-employed sub-contractor rather than treating them as if they are a company employee, you are potentially liable to pay more national insurance contributions and tax. If several “employees” are concerned in the matter, and the situation has been ongoing for many years, the amount of money involved may be substantial.

Status Inspectors are used by HMRC in this type of investigation, and you will require professional experts who have the right knowledge and experience to work on your behalf and to present an appropriate counter-argument to the inspectors. In cases where HMRC is challenging how you are treating payments to your workforce, a specialist can perform a review into your specific circumstances in order to determine the correct employment status for everyone involved in the inquiry. Should the review find that a discussion of your tax affairs needs to take place with HMRC, a specialist can then negotiate with them for you, and reach an agreement about the correct employment status of those workers that you pay.

Whether you have already received notice of an HMRC enquiry into your workforce’s employment status or whether you have concerns about whether you have correctly determined your “workers” employment status at any time, it is important to contact tax investigation specialists to resolve the matter and get the professional advice and guidance that you need.

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