HMRC have recently been asking businesses to self-review the employment status of subcontractors, to confirm whether they should be treated as employed or self-employed. This appears to be an area of focus for HMRC and companies that engage subcontractors should be wary of the tax consequences of treating a subcontractor as self-employed where they should be treated as employed.
We have seen a number of our clients receive a letter from HMRC asking them to check the employment status of subcontractors. This appears to be targeted at businesses in the construction industry at the moment, but it could also be relevant to others. A redacted copy of such a letter can be found here.
The letter is not a formal enquiry, but is an informal request for the business to self-review the employment status of subcontractors by a certain deadline. If the recipient of such a letter does nothing before the deadline, HMRC may take a more aggressive approach and issue a formal enquiry to the business.
If your business has received such a letter, and engages subcontractors where payments are not processed through the payroll, you should self-review the tax status. The simplest method of doing this is by using an anonymous toolkit produced by HMRC which provides their opinion on whether the worker should be treated as self-employed or employed.
However, HMRC’s online toolkit is only designed to provide an answer in simplistic cases and may not provide an accurate reflection of the facts. It leans towards an individual being treated as employed, and therefore the results should not be taken at face value. In more complex cases, or where the toolkit indicates an individual should be treated as employed, a more detailed review of the position should be undertaken.
If you have not received a letter, but engage subcontractors on a self-employed basis, then you should take the opportunity to consider the tax status of those individuals before HMRC ask you to do so.
The impact of a subcontractor being incorrectly treated as self-employed is that HMRC would seek PAYE and NI contributions for previous periods. This would be the employers liability (where the subcontractor is not engaged through a personal company), which could lead to significant costs.
In addition to the letters that we have seen recently, HMRC have also announced a consultation on the employment status of workers in the private sector. It is clear that HMRC are targeting employment status due to perceived lost tax revenue. Businesses should therefore ensure that they seek advice to confirm the tax status of subcontractors.
If you would like to discuss how the rules applied to your workers, please do not hesitate to contact one of our specialists.
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Connor Smith
View my articlesTags: Business Taxes
