Paul Mason wrote in the Guardian yesterday:
Trade unions estimate that around half a million of those are bogus and are really working for a single employer, using the status to collude with that employer to pay less tax.
His article was about more than that issue, but he recognised that the fact that this is true (I suspect this is a serious under-estimate, by the way) is an excuse to penalise those who take the real risk of employment which has resulted in the recently proposed NIC rises which were last week's problem for the government. In that case the real question is how to tackle this bogus self employment issue and not penalise those who should rightly be treated as self employed?
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 such records. I strongly suspect that there are those that do not.
Second, this will of course reveal those with disguised remuneration: there will only be one or two customers in that case.
Third, HMRC can 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 be required to supply a 52 week taking summary as an alternative. That would 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. The most important one is that fewer people will be exploited. And after that such a change would also uphold the credibility of the tax system. And that should matter to the government.
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I was an IT contractor for about 20 years, always as a limited company. When the Blair government brought in IR35 I complied and my tax bill doubled overnight, not the peanuts being talked about with the NICs increase but by several thousand pounds. I would love to have been self-employed but HMRC would not allow IT contractors to do this. I am now retired but over a period of 20 years I had about 10 different clients all over the UK (I worked away from home a lot) and was unemployed for about 18 months on several occasions. TBH I didn’t begrudge paying the tax as a sophisticated society like ours has to be funded. I will say the whole of IR35 was very badly policed by HMRC. On your rules I would not be classed as self-employed but I was a sort of hybrid I suppose. Any thoughts on this?
I am not saying there is a rule
I am saying data highlights risk
For the sake of the credibility of this vital blog please can we stop talking about the tax system as ‘funding’ anything ; it doesn’t . Our government spends first and taxes second, but not to fund that expenditure, but to control the spending power of the ( so-called ) private sector. As I try to explain to all those among my friends and acquaintances who will listen , did you ever hear of a civil servant going without his, or her wages at the end of the month because the government had run out of money , or a pensioner not being paid his or her pension. No of course not, because it can’t, because the government as the creator of the currency doesn’t have to ‘ find the money ‘ like a business , or a household . This is the operational reality not some fantasy and it is this misconception which is so central to our misunderstanding what money is in the contemporary world . We cling to the language that conceives of money as a thing in spite of all the evidence of the digital age that makes it plain that it ‘exists’ only on a computer screen.
“I am baffled as to why such a simple logic….” – the current UK gov’ is not interested in having any form of efficient tax collection, we know this from its actions. It is not interested in “logic” – the only interest of the Tories – as you have noted – Richard – is in retaining power – power for its own sake – nothing more, nothing less & this has been the case since the mid-18th century when this bunch of chancers and crooks first emerged into what passed then for the Uk body politic.
This issue seems to be always a real challenge and something that the rules just can’t seem to properly tackle. You write your contract in the right way and you’re in the clear.
Also, bear in mind in certain sectors, especially IT, it is the norm for contractors to provide service though a company and they expect it. There’s a real challenge there as at the moment if you don’t go along with this they won’t work for you.
There are obviously solution to that but it requires a mind-set change mostly at the hiring company level — essentially they have to accept they need to pay more to cover the extra tax the contractor’s will suffer — It’s all about money and cost to business I guess.
Your £150k is interesting! Bearing in mind I reckon it’s the IT industry that is the biggest issue and I suspect quite a lot of them are on over £150k!
This is probably a question that arises only from my distinct lack of knowledge, but wouldn’t making individuals record their top X customers make it quite difficult to reconcile data from millions of self-employed people? Lots of self-employed people might initially have few customers, and not necessarily for this reason. Do you think there could be a similarly simple responsibility to submit information, on the side of the companies rather than the individuals? For example, if a company’s ratio of turnover : staff : suppliers (the self-employed individuals who should really be staff) were suspiciously weighted?
And might it not also just shift the dodge elsewhere? If a large business is unscrupulous enough to build and exploit a workforce of self-employed people, wouldn’t they and their accountants also be canny enough to set up as many separate sub-companies as were required to obfuscate what they were doing, by having all the individuals invoice different sub-companies for slightly different things?
You highlight the need for anti-avoidance legislation
And the need to make employers responsible for any additional tax due
yes, absolutely… and I totally agree that “if you want to stop such abuse the simplest way is to ask for data on it, and not go round the houses” but it seemed to me that asking the registered self-employed for this data, while helpful, was almost literally “going round the houses” and perhaps not as logical as demanding it from the companies 🙂
Also, “HMRC can then concentrate effort in the right place” – the right place is less likely to be the self-employed person, even if they’re in collusion with the company, and much more likely to be the company itself, isn’t it? The company is the party that has most to gain from bogus employment of this kind, surely. And again, if so, collating data from millions of self-employed individuals to see which upstream companies might be the biggest fish for HMRC to catch seems more long-winded and error-prone.
The aim is to change behaviour
Just collecting the data does that better than anything else
Hence my approach
Hi Richard.
As a former status Inspector I am afraid that your ideal, although no doubt well intentioned, would be of next to no use. We were (and my successors still are) bound by court decisions and precedent and which outline no less than 13 factors which must be considered. Number of customers is just one of them. This does wrankle somewhat as if such a simplistic approach as you suggest could work, we would have implemented it decades ago. We were and are not that daft.
Oh dear. First, you are not bound by 13 criteria. And they are not precedents. They are procedure. Or HMRC guidance. So I think you are wrong.
Second, I did not say my criteria was the only one to use and would never suggest it was. I was simply suggesting improved data. But you apparently don’t want it. I have to question why that might be.
Third, maybe you did not notice I was trying to change behaviour. I see you are rigidly stuck in yours. How sad.
No wonder HMRTC needs a shakeup
The 13 criteria are from case law, so are pretty binding. Legally binding, in fact. So S Portnay is correct.
Read the Employment Status Manual. It give summaries of an awful lot of the case law – Hall v Lorimer is a source for a lot of the criteria that HMRC routinely use, for example.
Did I say they had to be ignored?
Or there was only one?
No. I was suggesting better data on one where the chancoe of behavioural change was high
But you and S Portnay are too small minded to see that
I think you are guilty here Richard of being too dismissive of an expert. S Portnay is correct about being bound by precedents and court decisions. The status of the self-employed, employees and the new in-between definition of worker that is emerging are the product of centuries of court decisions, not legislation. There are all sorts of criteria to consider, such as the engaged person’s right (often in a contract but in practice bogus) to send a substitute.
Look how difficult it was for workers at Autoclenz, Derby to get justice. This was a whole workforce of car valeters all cleaning cars under the orders of an employer. They were on bogus self-employed contracts with the aim of paying less than minimum wage and denying them paid holidays. The car valeting industry still does this, having made minor changes to the standard contracts after the verdict.
I am not as dismissive of your ideas as S Portnay, as it would help targetting, and demonstrate the scale of the problem. But it would be useless without much more resources for HMRC and a willingness to challenge these arrangements with the risk of defeats in courts or Tribunals. It may well need legislative changes.
It would need legislative change
How else could it happen?
That over rules precedent
And I never once said precedent need be ignored or this was the only criteria
That was a product of S Portmay’s imagination
So I dismissed the argument because it simply was about something I did not say
Oh Dear. It seems that what other people have told me about you is true. You are impervious to other people’s views unless they are cravenly supportive and you are rude with it.
You quite clearly claim that bogus self employment can be identified by one change to the tax return. It could not. The criteria I mention are from tax cases and so are indeed precedent. The matter is complex and with many greY areas not the simplistic situation you claim. The idea of someone such as yourself, rude to those offering advice and willing to share decades of experience, being in charge of HMRC is frightening. You completely lack the people skills to be in charge of anything.
My last post here, sir, I am clearly wasting my time.
You are indeed wasting your time because you either wilfully misread my comment which made clear I make none of the claims you fabricate or you really aren’t up to debating. That’s not rude: that’s objective comment on time wasting