|The law firm claims that HMRC is concerned that some large businesses are underpaying Employers’ National Insurance contributions by classifying some of their workers as self-employed or paying them through a personal service company (PSC) when they should be employees for tax purposes.
HMRC recently won a tribunal case against Alan Parry, the former Sky Sports football commentator, regarding whether he should have been taxed as an employee under IR35. The tax bill was £356,000. (See: Sky Sports presenter hit with £356,420 IR35 tax bill - Shout99, July 2022).
The Government changed the tax rules for off-payroll in the private sector workers the IR35 regulations in April 2021. The new rules imposed tax and compliance risks on large and medium sized businesses when engaging individuals through PSCs. Previously, the contractor was responsible for applying IR35 and paying any employment taxes that were due.
Penny Simmons, a Legal Director at Pinsent Masons, says that these figures suggest that HMRC still believes that many large businesses are continuing to pay contractors on a self-employed basis, when they should be 'employees' for tax purposes. This may be because HMRC considers that they are not applying the IR35 rules correctly, although this may also reflect that HMRC is increasingly questioning whether businesses should be paying individuals on a self-employed basis (even when the IR35 rules don’t apply because the workers are not engaged through PSCs).
The test for determining whether an individual is an employee for tax purposes is complicated and can be difficult to apply, creating an additional and unwelcome layer of complexity for businesses. There is no single test – rather a business needs to consider a number of factors, which means that in some cases, even when a business believes that it has applied the test correctly, HMRC may still disagree with the tax status determination. There has also been much criticism of the accuracy of HMRC's online status assessment testing service.
Penny Simmons said: “Large businesses need to review how they engage off-payroll workers and manage employment tax risks. Businesses should ensure they have robust on-boarding procedures in place and are applying the IR35 rules correctly, whilst also having a process for making comprehensive employment tax status determinations for all workers to be paid on a self-employed basis."
Steven Porter, a Partner at Pinsent Masons says that businesses who engage large numbers of contractors (either through PSCs or as self-employed individuals) run the risk of HMRC investigations and potential penalties. In recent months, HMRC has begun to levy penalties on businesses that have misapplied the IR35 rules having given them 12 months’ grace period following the IR35 rule changes.
Steven Porter said: “Off-payroll workers are one of HMRC’s biggest priorities at the moment – even businesses that have sought to comply with the IR35 rules are finding themselves in the crosshairs.
“HMRC believes it may be missing out on more than a billion pounds a year from large businesses that are paying workers on a self-employed basis. Figures on that scale will push off-payroll workers to the front of the queue when it comes to HMRC opening investigations.”
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