Self-employed could be causing £1.4 billion hole in HMRC accounts

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Law firm Pinsent Masons urges businesses to look at tax status of employees to avoid fines

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MRC suspects large businesses of underpaying £1.4 billion in employment taxes as it cracks down on “hidden employees”, or self-employed workers that the authority believes should really be classed as employees for tax purposes.

According to international law firm Pinsent Masons, the Government tax enforcement arm has been concerned that some large businesses are underpaying Employers’ National Insurance contributions by classifying some of their workers as self-employed when they should be employees for tax purposes.

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This could include both workers who are paid by businesses on a self-employed basis and those who are paid through a personal service company (PSC) and fall within the rules.

Tax regulation for off-payroll workers – known as IR35 – changed in April 2021. The new rules imposes tax and compliance risks on large and medium sized businesses when engaging individuals through PSCs.

Previously, the contractor was responsible for applying IR35 and paying all employment taxes that were due.

Penny Simmons, legal director at Pinsent Masons, said that the figure suggested that HMRC still believes that many large businesses are continuing to pay contractors on a self-employed basis, when they should be employees for tax purposes.

Simmons said: “Large businesses need to review how they engage off-payroll workers and manage employment tax risks. Businesses should ensure they have robust on-boarding procedures in place and are applying the IR35 rules correctly, whilst also having a process for making comprehensive employment tax status determinations for all workers to be paid on a self-employed basis.

Steven Porter, partner at the company added: “Off-payroll workers are one of HMRC’s biggest priorities at the moment – ​​even businesses that have sought to comply with the IR35 rules are finding themselves in the crosshairs.”

“HMRC believes it may be missing out on more than a billion pounds a year from large businesses that are paying workers on a self-employed basis. Figures on that scale will push off-payroll workers to the front of the queue when it comes to HMRC opening investigations.”


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