Companies beware of a clamp down on bogus self-employment

On the face of it, identifying those people in your business that are self-employed should be straight forward. But, as with the Governments changes to IR35 rules, it’s expected that HMRC will move onto clamping down on ‘bogus’ self-employment next.

Contracting with someone who is self-employed in your business should be simple and the current system means that businesses can get huge cost savings (employer’s national insurance and apprenticeship levy) by using self-employed people over regular employees. These people are taxed less, and businesses do not need to provide them with benefits like pensions, paid sick leave, and insurance that they normally offer to employees.

It looks like the changes to IR35 may only be the start of HMRC’s clamp down. It’s likely that HMRC are going to be very active in the coming months and years checking not only IR35 status butwill also look at businesses that use self employed people and the working practices applied to those people.

The key to all this is how much the working practices are controlled by the business. To put it simply, an individual will be deemed an employee if their working practices are significantly controlled by the employer. This will include things like the days and hours they canwork, when they can take holiday, place they can work, or their start and finish times. If a business controls these things, then the individual is most likely to be classed as an employee and will be entitled to rights such as a notice period, holiday pay, and redundancy pay.

It’s believed that some businesses are trying to avoid these laws by registering individuals ‘self-employed’. This is called ‘false self-employment’ and means the company to avoid paying for holiday pay, benefits, and National Insurance contributions (NICs).

There was a case in July 2020 of a self-employed hairdresser in Lancashire won the right to claim employee rights.

With nearly five million self-employed people in the UK, HMRC and government need to give businesses and the self-employed clarity. Otherwise, many businesses may unwittingly fall into the trap of breaching rules. Vague rules and complexity in trying to understand them are currently leading to uncertainty in the business and self-employed community.

Our advice is, if you currently employ contractors, freelancers or self-employed people within your business, then now, is the time to consider the terms under which you contract those people. Consider both IR35 rules and potential changes by HMRC to clamp down on bogus self-employment.

If you need help around IR35 or people in your business who are self-employed, we can advise you. Contact us now.

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.