Self-employed "Hidden workers" attract the attention of HMRC investigations

HMRC suspects large businesses are underpaying £1.4bn in employment taxes as it attempts to crack down on ‘hidden employees’ and plug the sizable gap in government finances.

Businesses can underpay Employers’ National Insurance contributions (NIC) by either paying employees on a self-employed basis or through a Personal Service Company (PSC).

The campaign against businesses underpaying NIC was not without its detractors. In fact, Liz Truss’ short-lived Government had even proposed scrapping new IR35 rules that had made employers partly responsible for avoiding NIC. However, that decision to scrap IR35 was itself cancelled!

So we are back where we started with HMRC launching a large number of IR35 investigations and pushing those all the way through the courts.

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 a disguised employee and should have been subject to the taxes of a PAYE employee.

The IR35 rules imposed in April 2021, that the Truss Government had tried to scrap, meant the responsibility for applying tax rules transferred from the contractor to the employer.

This meant tax and compliance risks for off-payroll workers fell on large and medium-sized businesses to decide the employment status of their workers.

The test to determine if an individual should be regarded as a PAYE employee 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’, among other things.

This 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 provided a 12-month grace period following the rule changes.

As the grace period has come to an end, businesses that hire contractors without professional legal and tax advice should be concerned.

To best mitigate the damaging impact of a long and arduous tax investigation, businesses should seek professional advice to safeguard against the damaging financial cost of such an investigation.

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.

Tax investigations can be very stressful and costly for those involved. We work with insurers, PfP, who are specialists in this area.

To protect yourself against the cost of most tax investigations, subscribe to our Tax Investigation Service by clicking here.