The arrival of IR35 legislation within the private sector, Brexit, dealing with off payroll working, and the recent Uber case in the Supreme Court, have focused minds on the need correctly to identify the employment status of those carrying out work for businesses.
It is important not to lose sight of the fact that alongside employment status, tax status is critical – as one does not necessarily follow the other.
It is widely understood that HMRC will be seeking to maximise its collection of taxes properly due, given the significant expenditure on support schemes related to COVID.
Businesses should be aware that their use of the Furlough Scheme could lead to HMRC auditing furlough records, and from there, conducting a full payroll audit in order to ensure they are tax compliant.
In addition to issues such as minimum wage, expenses, benefits in kind and director’s use of assets, a number of recent developments could give rise to unforeseen tax issues:
- Uber: Worker status is not determinative of the tax status of an individual. An assessment should be made in relation to each such individual to ensure that the company is correctly complying with its tax obligations. In this context it is important to note that whilst employment law recognises three distinct categories, employee, worker and self-employed, HMRC operates by reference to PAYE or Self-Assessment only and payments made to workers who are not employees do not fall within the obligation to operate PAYE. In addition, HMRC is also reported to be looking at the VAT position of intermediaries which may create a further liability that businesses have not made adequate provision for.
- IR35: When assessing whether an individual falls within the new IR35 regime, it is essential to ensure that the contracts in place reflect the commercial reality of how the services are carried out. It is all too easy for a company to correspond throughout an engagement directly with an individual, and not via the limited company with whom it contracts. In such a case, particularly where changes to contracts and working arrangements are notified directly to the individual, there is a risk that a separate contract is created between the individual and the company, which may be an employment contract. All correspondence and particularly notifications relating to the terms of the contract, should be addressed to the intermediary company in order to avoid this risk. Even where a business concludes that an individual is outside of new IR35, there is still an obligation on the individual to carry out an assessment of their employment status under the old rules.
- Brexit: As staff seek to work remotely from different countries, it is important to remember that a consequence of Brexit is that the UK no longer benefits from the free movement of workers. Care must be given when looking at the tax consequences that arise for the business – such as whether a permanent establishment has been created or the tax treatment of non-resident directors.
Arrangements which genuinely appear to be freelance or self-employment at their commencement can, over a period of time, drift into a reality which looks much more like an employee relationship, particularly in relation to very senior individuals in a company structure. It is very clear from Uber and other cases which preceded it, that HMRC will not feel itself bound by the terms of the written contract between the parties, where these appear to be at odds with the underlying nature of the working relationship in practice.
As we ease out of lockdown, remaining financially viable is a top priority for all businesses. An unexpected tax bill could be ruinous. HMRC may make assessments going back up to 20 years depending on the culpability of the taxpayer. As well as seeking payment of any tax, HMRC can also charge interest and impose fines – even if the error was careless.
The beginning of the new tax year is a good time to ensure that the classification of those working in your business is correct and that you can demonstrate the reasons for your classifications in the event of any challenge by HMRC.
We are happy to help with this and with any revenue questions or investigation which may arise following visits and audits.