Are SMES in fir­ing line of com­pli­ance ac­tiv­ity?

Belfast Telegraph - Business Telegraph - - Analysis & Company Report - By sam beat­tie, Man­ager, Pay­roll For fur­ther in­for­ma­tion or ad­vice, Sam Beat­tie can be con­tacted at sam.beat­tie@ie.gt.com Grant Thorn­ton (NI) LLP spe­cialises in au­dit, tax and ad­vi­sory ser­vices

Are­cent dis­clo­sure from HMRC has con­firmed that HMRC’S com­pli­ance ac­tiv­ity in 2015/16 boosted the Trea­sury’s cof­fers by an ex­tra £705m of PAYE and NIC.

Some SMES have sus­pected for years that they have been at the sharp end of HMRC’S at­ten­tion when com­pared to big busi­ness, and the de­tails within this re­port may go some way to sup­port­ing that view. Of the £705m to­tal, £322m (45%) of the yield was col­lected from SMES, with the re­main­ing £383m from large em­ploy­ers.

While HMRC can (and should) be pleased with the re­sults of their ac­tions, pru­dent em­ploy­ers should ex­pect HMRC’S fo­cus to re­main in this area. Much of the Rev­enue’s suc­cess had been achieved by chal­leng­ing the em­ploy­ment sta­tus of work­ers. Where HMRC de­ter­mines that work­ers have been in­cor­rectly treated as con­trac­tors; or as hav­ing self-em­ployed sta­tus; or off-pay­roll worker sta­tus, any short­fall in tax will usu­ally fall in the first in­stance on the em­ployer.

The growth of the gig econ­omy (the part of the labour mar­ket with a preva­lence of short-term con­tracts or free­lance work, as op­posed to per­ma­nent jobs) has be­come news­wor­thy fol­low­ing some high-pro­file le­gal cases over the in­di­vid­ual’s rights and le­gal pro­tec­tion for gig econ­omy work­ers. It is there­fore no sur­prise that the tax treat­ment of pay­ments to those in­di­vid­u­als is also in the spot­light. The chair of the par­lia­men­tary Work and Pen­sions Com­mit­tee has re­cently stated that the govern­ment must “close the loop­holes that are cur­rently be­ing ex­ploited by these com­pa­nies as part of a wide-rang­ing re­form to the reg­u­la­tion of cor­po­rate be­hav­iour” which they go on to say is “po­ten­tially cre­at­ing an ex­tra bur­den on the wel­fare state”. The com­mit­tee also com­ments that an as­sump­tion of worker sta­tus by de­fault would pro­tect in­di­vid­u­als and the pub­lic purse.

Off-pay­roll work­ers will likely fall into the cat­e­gories of agency work­ers; per­sonal ser­vice com­pa­nies; or in­di­vid­u­als, and HMRC is likely to chal­lenge any blan­ket sta­tus treat­ment of off-pay­roll work­ers on prin­ci­ple.

In most cases in­di­vid­u­als will have paid in­come tax on their earn­ings, and it is there­fore the re­cov­ery of na­tional in­sur­ance which at­tracts much of HMRC’S at­ten­tion.

How em­ploy­ers ad­dress both the PAYE and NIC risks and the le­gal en­ti­tle­ments of em­ploy­ees could be cru­cial in de­ter­min­ing the out­come of a com­pli­ance re­view from HMRC. Crit­i­cal to any de­fence of an off-pay­roll worker/ con­trac­tor sta­tus will be ev­i­dence of how the busi­ness or or­gan­i­sa­tion ar­rived at the de­ci­sion, when it was re­viewed and the in­di­vid­ual fac­tors in­volved.

HMRC has pro­vided on­line sta­tus in­di­ca­tors which pro­vide some com­fort based on in­di­vid­ual cir­cum­stance. These in­clude: right to refuse work or mu­tu­al­ity of obli­ga­tion; con­trol, who di­rects the work; type of en­gage­ment and du­ra­tion; rate of pay; right of sub­sti­tu­tion/ex­clu­siv­ity; how work is paid; fi­nan­cial risk and op­por­tu­nity to profit; pro­vi­sion of equip­ment/in­for­ma­tion/ tools/fa­cil­i­ties and in­sur­ance/in­dem­nity.

The onus is very much on the em­ployer to get the em­ploy­ment sta­tus right. Whilst there may be a pref­er­ence to en­gage con­trac­tors in lieu of em­ployed work­ers, the po­ten­tial of a pro­longed dis­pute with HMRC makes that op­tion less at­trac­tive.

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