If and when the Off-Payroll Regulations are extended to all private firms in a future budget, it will also provide the HMRC with another opportunity to help eliminate disguised employment.
Disguised employment occurs when a person provides their personal services under the guise of being self-employed, when in fact the nature of the working arrangement with their engager is one of an employee/employer in all but name.
In many cases the arrangement is one of mutual convenience that benefits both parties for sound commercial and pragmatic reasons. In other cases, the relationship is one that allows the exploitation of the worker, which is why the growing raft of anti-slavery legislation has been introduced to stamp it out.
Disguised employment also results in less tax being collected in, which of course explains why the HMRC is determined to see an end to it too.
Disguised employment is a common problem in the beauty/hair saloon trade, transport (taxi and lorry drivers), catering and hospitality sectors as well as the construction trade … to name but a few. It is the construction trade that the rest of this article will devoted to because it subject to an interesting compliance paradox issue.
According to the CITB, there are 200,000 construction firm operating in the UK of which 90% are small firms consisting of less than 10 workers. It is likely the vast majority of those small firms do not directly employ their workers. Most will be engaged as self-employed sub-contractors, often in the absence of any written contracts to define their working relationship.
The construction sector is currently undergoing significant changes brought about by two independent forces.
The sector was already the subject of concerted efforts from many quarters to improve general compliance with safety standards well before the Grenfell Tower fire tragedy highlighted just how bad matters really were.
One of significant motivating factors for construction firms to put their house in order, is the increasing demand by their insurance underwriters to prove they are meeting safety standards each year. Insurance compliance audits are becoming the norm for even small construction firms, and unless they meet the grade they will find it hard to obtain cover and quickly go out of business.
One of the conditions that the insured must comply with, is distinguishing and recording in detail how many labour-only and bona fide sub-contractors they engage during the period of cover.
For reasons based on the reality of the situation, the insured engager will be forced to confirm to their insurance underwriters which of the sub-contractors fall into the labour-only category.
Unfortunately, the insurance underwriter's definition of a labour-only contractor matches the HMRC definition of a worker who would be more properly classified as an employee for tax purposes. This means labour-only contractors cannot be treated as self-employed, and must be paid under deduction of tax at source under a PAYE registered scheme.
The level of indifference to tax-compliance in the construction sector has been a bad joke for many years. The fact that the HMRC has not actively enforced the law in terms of stamping out disguised employment has led to a false sense of security for many who continue to believe they can evade and avoid their tax obligations. We suspect that illusion is about to be well and truly shattered.
As the need to demonstrate insurance compliance on safety issues spreads downwards from the larger firms, through the supply chain, to the smallest of independent workers … the HMRC will find all the evidence they need to prove disguised employment is present. Claiming to be self-employed and being classed as a labour-only worker are mutually exclusive.
Although the HMRC already have the legislation they need to levy back-duty assessments on employers for disguised employment, the expected extension of the Off-Payroll Workers Regulations will give the HMRC a new starting point to go over those employers who flaunt the law
It is worth pointing out the HMRC already know which construction firms can be investigated for disguised employment. The HMRC have to look no further than the CIS returns made by construction firms make who report they have engaged the same self-employed individuals for most of each month for any extended length of time.
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