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HMRC clamping down on individuals wrongly classified as self-employed, with SMEs hit particularly hard

Payroll errors cost UK employers more than £700 million in the last financial year, with underpaid tax relating to individuals who were wrongly declared self-employed at the root of many of the problems.

Research from accountancy firm UHY Hacker Young found that HMRC collected £737.3 million from investigations into employer compliance, much of it relating to self-employment.

This included cases where businesses had declared individuals to be self-employed. When HMRC decided they should count as employees, the firms became liable for national insurance payments and, in some cases, higher tax charges than they would have paid if they had initially declared them as employed.

UHY Hacker Young head of tax Roy Maugham said the onus was on HR teams to apply rigorous tests to determine who was truly self-employed. “A lot of cases are grey rather than black or white,” he told People Management. “Tests include whether someone is capable of substituting themselves.

“Companies used to ask individuals to invoice them through a company name but HMRC is looking at things like: does that person have a pass to the canteen? Are they on the employer’s telephone list?

“You could take someone on for a specific project but you could end up exerting a level of control that makes you their employer in HMRC’s eyes.”

SMEs were hit particularly hard by a crackdown on payroll tax deductions, accounting for about half of the cash collected – despite being responsible for only a tenth of UK payroll.

Maugham said: “Much of the underpaid tax is down to genuine errors. This strongly suggests the government needs to simplify its systems to help SMEs avoid mistakes.

“While SMEs will be reluctant or unable to pay for expert advice, they are clearly struggling to navigate the tax system as it stands.”

Umbrella companies – which employ outsourced personnel on a fixed-term basis, often offering a cheaper alternative to employing full-time staff – have been a particular problem for SMEs when it comes to payroll tax.

“Those employing flexible workforces or operating as umbrella companies, for example, might find it difficult to determine which box their labour force falls into when it comes to paying tax,” said Maugham.

“With HMRC honing its ability to spot inconsistencies in tax returns across the board, small clues – such as when a supposedly outsourced employee is offered annual leave by a company – will trigger an investigation.”

He said such probes could be disruptive as well as costly. “While some may be actively looking to avoid paying tax, the vast majority of SMEs will simply be tripping up on a complex tax system,” he added.

Helen Hargreaves, associate director of policy and research at the Chartered Institute of Payroll Professionals, said the research findings showed the need for employers to use qualified payroll practitioners. “With increasingly complex government legislation, as well as HMRC’s greater focus on compliance, it is unsurprising that more issues are being discovered,” she said.

Source: Payroll mistakes cost businesses more than £700m – People Management Magazine Online