HMRC has collected £705 million in additional tax through investigations into companies’ payroll taxes over the last year, according to Pinsent Masons.
The department has been cracking down on businesses across the board, with a focus on what it views as disguised self-employment and possible abuses by intermediary labour provider businesses, according to Pinsent Masons.
While many umbrella companies operate legitimately, some have engaged in tax avoidance via abuse of travel and subsistence tax reliefs currently available to contract workers. Umbrella companies viewed as abusive by HMRC often pay contractors the minimum wage then supplement each individual’s income, reducing the amount of tax collected. £322 million was collected from SMEs, and £383 million from large businesses in the past year.
Paul Noble, tax director at Pinsent Masons, explained the circumstances HMRC has been looking out for: “There were plenty of companies that were not gaming the system as they were legitimately placing skilled employees with clients for short distinct projects, then moving them to another project when it was completed,” he told HR magazine. “As long as each assignment was part of the overarching employment with the labour provider then paying T&S (travel and subsistence) was absolutely fine.
“However, within the same sector other companies would take on an employee, place them at a client, and terminate their employment when that project finished. That is not a temporary workplace and any payment for travelling to work or reimbursement for hotel costs and so on should have been taxed.”
It is this second practice that new legislation introduced in April 2016 is designed to address. It treats workers from umbrella companies as employed by the company who engaged them and treats each location they work at as their normal workplace. This restricts the expensing of travel and subsistence for workers from umbrella companies.
However, Pinsent Masons said that some of the above additional tax take related to errors on employers' parts complying with the tax system. SMEs are particularly at risk as they often lack in-house tax specialists or access to professional guidance, the law firm said.
Noble recommended that employers think carefully about their workers’ statuses to ensure they do not fall foul of the law.
“Ask yourself: are they an employee, self-employed or this nebulous concept of a ‘worker?'" he said. “Most of the time the answer is obvious. You take someone on to work as part and parcel of your organisation. They sit within a structure where there is control over what they do, where they do it, how they do it. There is an expectation that the employer will provide the employee with work to do and that the employee will do the work, and they can’t ask someone else to do it in their stead.”
He highlighted the recent Pimlico Plumbers case as an example of how the law can become complicated if these boundaries are not understood and applied.
“There the plumber had some factors for employment – such as an expected number of hours, he wore a uniform, and had to provide personal service – but other factors pointed at self-employment, such as provision of tools and materials etc. There the Tribunal found the plumber to be a 'worker', giving various employment rights such as unfair dismissal, access to the national minimum wage, holiday and sick pay but it fell short of an employee, thus Pimlico was not liable for PAYE and Class 1 NICs.”
The news follows the government's recent U-turn on higher National Insurance rates for self-employed people outlined in the Spring Budget. It's expected that Matthew Taylor's review into modern workplace practices, due for publication this summer, will explore how policy needs to develop over the next five to 10 years on tax.
