The government announced in the Autumn Statement last week that:
As the next step [in tackling abuse of employment taxation], Autumn Statement 2013 announces action to prevent employers and employment intermediaries from avoiding employer NICs and circumventing their employer obligations. The government strongly supports enterprise and those who choose to work for themselves, and believes that the tax system should continue to recognise the additional risk someone who is genuinely self-employed takes on. But the government is acting now to level the playing field so that companies cannot use employment intermediaries to disguise employment as self-employment and thus avoid employment taxes and deny employment rights to their workforce. The government will legislate to prevent employment intermediaries from being able to use contrived contracts to 4 Autumn Statement 2013disguise the employment of workers. This will take effect from April 2014 and raise around £400 million each year.
I warmly welcome this. Indeed, I suggested tackling this abuse years ago - before this blog began - to HGMRC and I have given it an outing on odd occasions ever since.
The easiest way to do it though, by far, is not to worry about contrived contracts, important as they might be. The best way to tackle this is to change the tax return requirements for all businesses - whether self employed, companies or LLPs, with reported turnovers of less than £150,000. This, admittedly, is the vast majority of such businesses, but so be it.
For these businesses, which will cover almost every single concern hiding a disguised employment, a straightforward request should be added to the tax return, which is that the top ten customers by turnover be declared on the tax return.
There are four reasons for doing this. First, this will require businesses to have records. I suspect there are those that do not.
Second, this will of course reveal those with disguised remuneration: there will be one or two customers only.
Third, HMRC then concentrate effort in the right place.
Fourth, and as is always the case in my thinking on such issues, the chance of being found out will have been increased dramatically, meaning that the incentive to abuse will have been reduced.
And yes, I know cash businesses do not fit in: they should supply a 52 week taking summary as an alternative. That will also be telling.
An extension of flat rate allowances would more than compensate for the effort involved and save a great deal, overall.
I am baffled as to why such a simple logic - which I proposed years ago in a meeting with HM Treasury - still cannot be embraced because if you want to stop such abuse the simplest way is to ask for data on it, and not go round the houses.
The fact that we might close a bit of the tax gap as a result is just one of the bonuses that might result.
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So 1 or 2 customers = disguised remuneration? Basic answer to a complex problem?
What absolute nonsense!
It’s not absolute proof
It’s one heck of an indicator
And that’s the point of it
Tax retursn should be about assisting risk appraisal – and that is what this does
We should also point out that bogus self-employment or use of employment intermediaries is one of the most effective ways to disguise a deliberate failure to pay national minimum wage for work done.
It is a scandal that big profitable companies can have a workforce of 100s or 1000s of workers, all working under the same terms and conditions and in reality obliged to do what they are told, but all supposedly little businesses in their own right.
Often the end user of labour gets the whole scam marketed to them off the shelf by an umbrella company or intermediary. I wonder how the lawyers and accountants who dream up and defend these schemes sleep at night.
I suspect this a factor in my survey of self-employed earnings
In my opinion, a significant part of the problem is those employers who force employees into, perhaps self-employment and then, a limited company by telling those employees that it’s change or be made redundant, the point of the exercise being to transfer the employment costs additional to basic pay, ie employer’s NIC, holiday pay, sick and the like, onto the shoulders of the employee. I have seen this happen to several former employees, none of whom had either the loss of employment rights or the other cost issues explained to them by their former employer.
While I don’t disagree with the thrust of what you’ve written, people who have only ever been employed don’t, in my experience, usually have much understanding of the tax and other contractual issues of self-employment or limited companies – because it’s just never been something they needed to be familiar with. Ultimately, all these former employees see is that they’re suddenly poorer and, as a direct result, more inclined to grab at anything that restores their former financial position, including gaming the tax system.
Is it therefore unreasonable to conclude that, in situations of this kind, it’s the employers who are benefiting from any tax abuse, even though it’s the former employees undertaking it, and that something is needed to prevent employers from being able to shift the additional costs of employment away from themselves so very easily.
I haven’t yet figured out what the something might be!
Effectively, some employers are shafting their staff by forcing them away from employment; it’s those employers that gain, not their former staff, ie the employers reduce their costs In some cases, it’s employers who are driving tax abuse, albeit indirectly, by circumventing their obligations.
And I’d like to see something that forced those employers to stand up to their obligations
Totally pointless exercise.
Large ‘umbrella’ companies will have turnovers well in excess of £150,000.
Even a small LLP set up to take management in a group out of employment and into self-employment will exceed this turnover limit.
Companies to return this info?! Then what? We already have IR35 and we’ve seen how ineffective that is.
And employment/self-employment is still decided on case law where number of customers is one (trivial) factor when compared to the dozen or so other factors.
For the additional extra burden to business all HMRC would end up with is a mountain of pointless extra information. Thank goodness HM Treasury sensibly rejected your idea.
Let’s get real
First this need not be the only tool
Second this us about risk assessment – for HMRC
Third it us about creating risk for those thinking of abuse
Fourth – of course this does not tackle marketed schemes – they need a different focus
But that does not mean it’s not useful
It’s just your excuse for inaction
When I look at many contractors using companies which ‘fit’ within the case law criteria and compare that to my preception of reality then it is clear, to me at least, that although the case law tests are met for self employed status, the reality is that they do exactly teh same as me – come in work their hours and go home – they have no risk that is normally associaetd with self employment, other perhaps than on paper.
So to my mind the case law tests are inadequate. But it seems that HMRC lose over and over again when they try to confront ‘contractors’ and my perception is that it because courts look to the contracts and rely on them without testing whether in reality some of the clauses are genuinely adehered to and so genuinely pass risk to the contractor. It’s a tough one for HMRC to combat.
So we need to revive the tests
HMRC usually win the cases they take to court, but do not have the resources to challenge enough scams to stop whole industries going over to bogus self employment,, umbrella companies and workers forced by their real employer that they are directors of their own little company providing floor sweeping services or whatever.
Unions have won similar cases, such as UNITE winning for car valeters working for Autoclenz in Derby. However virtually all car cleaners in the UK apart from this site in Derby are still supposedly self-employed. The companies have just put in new contracts which they say are more effective in proving people are self-employed.
I’m not sure if this industry has gone so far as to instruct workers to buy a Ltd company each. Some valeters will have been puzzled by their “employer” instructing them that every so often they must send some one else to do their job for a day.
All of this is another facet of “predatory capitalism”, in this instance it is the “faux self employed” ie employees instead of customers/clients being shafted.
Thanks for this, Richard – it’s given me a lot of food for thought.
Another factor which I believe needs consideration is that of liability. Currently, the only way a self-employed individual can legally limit their liability in their work is to work through a personal-service company.
I’m a self-employed computer consultant (as well as a committed leftist who pays their taxes willingly and gladly), and recently made the decision to start a personal service company for precisely this reason – I took on some work on systems managing medical records and wanted to insulate myself from some of the legal risk involved.
I thought long and hard about this decision and came up with a renumeration scheme that I felt allowed me to do this without unfairly reducing my tax payments, specifically:
1. The proportion of my gross earnings paid as tax must increase monotonically with my gross earnings
2. The proportion of my gross earnings paid as tax must be within +/- 2.5% of what I would have paid as a sole trader or through PAYE (a two-tailed 95% confidence interval for the stats nerds)
3. The amount of remuneration I take as salary must at least cover my living costs. Dividends are a reward for risk, and my being able to survive predicates having the opportunity to take a risk with the remainder of my income, so it would be disingenous to claim that money I *have* to take every month for the business to survive constitutes a return on risk in this sense.
On doing so, I was astounded by the amount of resistance I encountered from accountants I spoke to who could not understand why a person would willingly choose *not* to minimise their tax payments.
I’d be very interested to hear your thoughts both on the question of limited-liability, and on the question of tax ethics for the self-employed in general. In particular, how the legitimately self-employed should organise their remuneration in a way that is fair, as well as how to differentiate between disguised employment and legitimate self-employment in a principled way. (I think IR35 is a rather blunt instrument in this respect -due to the nature of my work, I frequently work on-site for clients, and on occasion, will spend periods up to six months with a single client – is this sufficient to qualify as ‘disguised employment’?)
Many thanks,
Tim
Tim
When I was considering this issue theoretically in 2007 or 8 (search Arctic Systems on this site) I came to something like that
You may be more pure than I expected
But your logic is sound and I think a reasonable split between salary and risk is right
And IR35 is blunt – it needs a proper revisit
Richard