Employment status

Are they really self-employed?

This is the burning question for any company engaging self-employed individuals. Whatever industry your business operates in and no matter how many self-employed people you use, HMRC will challenge whether they are truly self-employed if you get an enquiry.

A lot of companies adopt the stance that they will deal with this as and when the problem arises and almost view it as though it was good while it lasted. This does not need to be the case however and considering the position before you get an enquiry can significantly increase your chances of coming out of an enquiry unscathed. If on the other hand, you bury your head in the sand and hope for the best it is likely to cost your business dearly.

One key aspect of this question is that it isn’t actually the right question to answer. HMRC will focus on your company proving that the individuals are self-employed and effectively have their own business. What the courts will consider is different however and they will focus on whether the individuals are your employees. This may seem trivial but its importance cannot be under-estimated because the threshold is much lower as you don’t have to prove they are fully fledged businessmen, just that they don’t have the characteristics of being an employee.

Liabilities?

Not many businesses sit down and consider the exposure if their self-employed individuals are reclassified as self-employed, possibly because the do not believe there is much you can do to improve the situation anyway. It is quite straight forward to get an idea of what liabilities HMRC would look to impose. If you work in the construction industry it primarily be employer’s national insurance that you have not been paying that HMRC will seek plus a small amount of employees NI because self-employed pay a slightly lower rate. This means you are looking at a liability of around 15% of what you have paid to self-employed subcontractors over the previous 6 years. If you business is not in the construction industry this amount jumps considerably as you will also be liable for the tax that should have been stopped thereby increasing the 15% to around 35%.

As a percentage, 15% does not actually sound too scary but once you apply this across the individuals you have paid on a self-employed basis and backdate it 6 years it is amazing how quickly it can add up. On top of this figure HMRC will look to apply interest and penalties. The penalties are likely to be up to 30% of the liability depending on your behaviour during the enquiry.

After considering the above it is easy to see why most businesses with an HMRC status enquiry do not survive as they simply cannot pay the liabilities. The saddest part of this is that in most cases it would be entirely avoidable if the company owners had considered this area previously and instructed experts in this field to handle their enquiry.

What can you do about it?

We have two businesses that can assist you with ensuring you are not exposed to HMRC.

The first is RIFT Legal in which we can have a look at your business and the way in which you pay people. This will include considering the employment status of the individuals you engage, how they work, what documentation you have and what policy’s they have to follow. Once the position has been reviewed it is easier to identify those that can be self-employed and those that should be moved to PAYE (if any). We can then provide you consultancy services via RIFT Legal to put you in the best position possible and be on hand if you have any queries in the future or get a knock at the door from HMRC.

RIFT’s services can include:

  • Reviewing documents with the self-employed individuals
  • Drafting contracts
  • Reviewing the business and how it uses self-employed individuals
  • Provide ad hoc telephone advice when required
  • Defend companies under enquiry                                            
  • Provide Legal cover so that our fees will be covered in the event on an enquiry
  • Provide our clients with an indemnity that if we cannot defend the position, we will pay the liabilities.

As good as we are at defending HMRC enquiries, they can last a long time, be very intrusive to the business and cause a great deal of stress. With this in mind, a lot of companies turn to ‘payroll’ companies that can contract with the subcontractors and pay the individuals for the work undertaken. This breaks the contractual and financial chain between the company and the individuals and means that the company is paying another business and can no longer be liable for the employment status of the individuals as that responsibility rests with the company actually paying them. This is a service that Marble can provide to its clients to give its client complete peace of mind over employment status so that it is no longer even a consideration.

If a company wishes to use the services of Marble we will need to consider how the individuals work to ensure we are satisfied they can be paid on a self-employed basis but assuming there are no issues there, it removes the risk of employment status liabilities completely.