Research has revealed that last year HMRC collected £737.3m from investigations related to employer compliance, with the majority of these involving issues surrounding self-employment.
In most cases HMRC determined that where businesses had considered individuals to be self-employed they should in fact be counted as employees and therefore organisations became liable for national insurance contributions. In some cases the charges levied by the HMRC were higher than they would have been had businesses initially declared workers as ‘employed’.
SME’s seem to have borne the brunt of the crackdown on payroll tax deductions, accounting for almost half the extra revenue collected, yet only comprising a tenth of the UK payroll.
According to one tax expert the onus is on the HR department to determine who qualifies as being truly self-employed.
This is not always so easy however. We are dealing here with a lot of grey areas rather than simple black or white tests e.g. ‘is someone capable of substituting themselves’ needs a determination that is not always so clear.
The HMRC is using more innovative tests to gauge whether they will consider a person an employee. Whilst the company may ask someone they consider to be self-employed to bill them through a company name, HMRC may decide to look at things like whether they have a pass to the canteen or are they on the employers’ telephone list?
The system itself has come under some criticism however. Many believe companies, particularly SME’s are making genuine errors on account of an overly complicated system. It should therefore be incumbent upon HMRC to simplify things so as to help people avoid costly errors.
When it comes to umbrella companies the problems increase for SME’s. This cheaper alternative to employing full-time staff can have great difficulty determining which bracket their staff fall into when it comes to seeing who should pay what tax.
All in all some companies may just need a bit of extra help in determining their payroll. It can be a complicated business but when understood easier to navigate. This helps explain why smaller businesses, many without a dedicated, expert HR department are bearing the brunt of tax collection, in most cases brought on by simple, avoidable errors.