Employment status: Time to review off-payroll arrangements
With greater scrutiny of employment status by HMRC, employers need to look carefully at their off-payroll labour arrangements, argues Hilary Stokes - employer solutions manager at Menzies LLP.
A series of recent employment tribunals against high-profile businesses have emphasised the need for employers to take care when agreeing the status of self-employed individuals.
In order to avoid making the same mistakes as companies such as Uber, it is essential that businesses put robust practices and procedures in place around their off-payroll arrangements.
In 2016-17, HMRC collected £819m in additional taxes following payroll investigations - an increase of 16% compared with 2015-16 (£705m).
Over recent months, several well-known businesses have hit the headlines and are facing tribunals around the employment status of their gig economy workers.
Cases such as Uber BV and Others v Aslam, in which "self-employed" drivers were found to be workers, is a reminder of the need for all businesses to carefully review the employment status of their workforce and take steps to avoid costly penalties.
Following the Employment Appeal Tribunal's investigation into the employment status of Uber's drivers, it is likely that HMRC will take steps to investigate the company's tax arrangements.
In addition to shortfalls in tax and National Insurance Contributions, employers found to have incorrectly engaged individuals on a self-employed basis could be liable to pay backdated statutory sick pay, statutory maternity pay, pension payments, redundancy pay and holiday entitlements.
As Government guidance emphasises, the employment law and tax law tests that apply to employment status are not the same.
While the employment tribunal uses three classes of status - self-employed, worker and employee - the current tax system only deals with two classes - self-employed and employed.
With this distinction likely to be a source of confusion for many, further clarity in this area could give businesses more peace of mind and would help them to avoid errors when taking on staff.
To protect against a potentially costly HMRC investigation, it is important for organisations to adopt a meticulous approach to taking on people.
Employers could choose to put everyone on the payroll, regardless of factors such as salary or contracted working hours. This, however, would be a very costly and inflexible solution.
An alternative would be to build robust engagement procedures to determine the employment status of each individual or group of individuals and this should start with a clear engagement contract.
As there is no single factor that decides the employment status of an individual, it is important that a wide range of factors are taken into account, and that the actual circumstances of the engagement are mirrored within the engagement contract.
Using an online tool such as HMRC's employment status indicator (ESI) can help to avoid mistakes that could have a significant impact on the organisation's bottom line.
The results of the ESI should be kept with the engagement records and used as a defence in the event of an HMRC inspection.
Another approach is to engage new recruits via an external agency, which will then be responsible for determining the individuals' employment status.
This can be costly, however, requiring the payment of agency fees on top of National Insurance Contributions.
Similarly, businesses considering taking on staff via a personal service company should be aware that this is only an option in the private sector and it is unclear whether such arrangements will be allowed in the future.
When reviewing off-payroll employment arrangements, it may be worth gaining the support of a third-party adviser, who will be able to recommend necessary practices and procedures to protect the organisation in the event of an HMRC review or an employment claim.
With the rise of the gig economy, the courts are increasingly seeking to clarify the employment status for individuals carrying out work on a short-term, job-by-job basis.
As such, it is vital that businesses waste no time in carefully reviewing the status of all off-payroll staff who do not receive full employment rights and benefits.
It is imperative that businesses adopt a meticulous approach to their off-payroll arrangements, to minimise the risk of future liabilities and safeguard their reputation.