Tackling false self-employment

There are a variety of different trading methods available that individuals can provide services through. There are also different status rules that apply to each of these trading methods and the manner in which you engage them.

With so many trading methods and differing rules for each, it’s no wonder that false self-employment has proven itself to be a complicated topic for businesses to master or even access suitable information.

What is false self-employment?

Put simply, false self-employment is where an individual is falsely labelled as working under self-employment when in reality, they are completing the work in a manner that is in line with employment.

False self-employment can apply to any individual fulfilling a role for your organisation without a contract of employment. However, there are different rules that apply depending on the trading method and manner in which they are engaged.

To keep things simple, we have put together a handy guide about which status rules apply to each scenario and what this means for your business.

Employment Status

Traditional employment status is focused upon the relationship between a client and their directly engaged sole traders.

Client businesses will need to determine the employment status of any sole trader engagements. The three categories used are:

• Employee
• Worker
• Self-employed and contractor

These categories indicate the employment rights of the individual, the responsibilities of their employer/the client organisation, and the tax that is applicable (take a look at our Employment Status Liabilities Calculator to find out how much you could be liable for).

Traditional employment status looks at the working practices of the individual and their relationship with the client organisation. The three key status tests that are used to determine self-employment are (but not limited to):

• Substitution: The right to provide an alternative individual in order to fulfil the services
• Control: The right to control how, when, and where the services are delivered
• Mutuality of obligations: The mutual lack of obligation between the parties

To find out more about traditional employment status, take a look at our designated information centre.

How does false self-employment happen?

There are a number of reasons why an individual may be falsely assigned their employment status:

1. The individual or the engager seeks to benefit from the lower rates of tax and national insurance contributions that are paid by the self-employed, such as with the use of a limited company
2. Misunderstanding or lack of knowledge of the status rules that apply to certain trading methods. Whilst IR35 is now widely known, the issues surrounding traditional employment status for sole traders are much less so.
3. Through the often unclear and subjective nature of applying employment status. The vast majority of workers and businesses seek to pay the correct tax however despite due diligence, HMRC do not always agree with the decisions made, and simple errors can still be made.

It is important that the employment status of contingent workers is considered and correct from the outset and that they work in a manner that is consistent with this status. Any mismatch could cause problems down the line with HMRC and leave businesses open to enquiry.

What are HMRC doing to combat false self-employment?

HMRC carry out routine checks into engagers. Their dedicated Employment Status and Intermediaries Team are tasked with policing all engagers of flexible workers. This targets not only traditional employment status but the onshore intermediaries and IR35 legislation also.

Whether their initial enquiry comes from the result of a routine check or a more targeted approach, a tactic previously used by HMRC, they are known to mount extensive investigations into companies. Not only is the defence of these investigations time consuming and costly but there is also the possibility that the case may go to a tax tribunal, and ultimately result in the repayment of owed tax revenues.