In recent months, HMRC have begun to take a very
hard line with the reclassification of subcontractors
to employment status. The effects of this can be
bad enough for a business but it now appears that
HMRC are taking a much harder line.
In a Special
Commissioners case known as Demibourne (SpC486),
the company was required to pay tax and national
insurance, under a settlement agreed with HMRC,
due to the reclassification of an individual as an
employee. HMRC practice over many years had been,
provided that the individual had paid income tax
on a self employed basis, to treat this as tax due
on earnings and to collect only NI from the employer.
This would include both employer and employee contributions,
usually with no deduction available for Class 4
contributions paid.
In Demibourne, HMRC sought a full settlement of
the tax as well as the normal procedure regarding
NI, which the Commissioners upheld. It would seem
that this practice is now becoming the standard approach
because:
- the tax paid on a self employed basis will usually
be lower than the amount due by an employee;
- if
an individual is reclassified as an employee,
they can make an error or mistake claim in respect
of earlier returns. This will result in a repayment
of the tax to the individual.
It now appears
that HMRC’s approach is to
demand the full tax and NI from the employer.
HMRC will only allow a set-off for the amount
of tax paid by the individual where the employer
can obtain a mandate from the individual stating
that the individual will not seek a refund of
the tax and requesting that HMRC set the tax
paid against the PAYE liabilities of the employer.
Of course, if the employer cannot trace the individuals
concerned, employers may have no option but to settle
the tax in full.
When a reclassification goes back beyond the time
allowed for error or mistake claims by the individual
concerned (5 years and 10 months after the end of
the tax year), the tax cannot be repaid to the individual.
HMRC should give a full set-off for this in the settlement.
A second change is that HMRC officials often used
to accept that any reclassification could apply for
the current year onwards. HMRC officials now appear
to be under instructions to pursue all earlier years
rigorously.
If you have contact from HMRC regarding this, or
an Employer Compliance Review, please contact us
urgently.
Internet link:
Demibourne case
