HMRC Penalties for Self-Employed Workers

The rules around engaging workers on a self-employed basis have been tightened up by HMRC over the last few years. The aim is to reduce the number of workers it thinks may be engaging in ‘false self-employment’ and paying less in taxes as a result.

Deliberate failure to pay tax

Self-employed workers are responsible for paying their own income tax and national insurance contributions (NICs). Failing to do so can lead to HMRC demanding the payment of any tax monies owed, plus interest. If the failure is judged by HMRC to be deliberate and without a reasonable excuse, a penalty, decided by HMRC and varying in amount from case to case, may also be applied. It could be in the range of 30-50% of the amount owed.

Burden is now on agencies

With agency work, the onus on deciding a worker’s status is on the agency. If an agency is found to have wrongly given self-employment
status to an employee, HMRC will seek to recover any unpaid tax, NICs, plus interest from the agency and may apply similar penalties on top.

Under new legislation in 2014, the burden of proof has shifted somewhat, and agencies are now required to keep a record of why income tax and NICs haven’t been deducted from their workers’ pay. If this is because they don’t consider the worker to be subject to the supervision, direction or control that makes them an employee, they must be able to show evidence of this. Without sufficient evidence, HMRC may seek to recover tax, interest and apply a penalty, as described above.

For example, under the Construction Industry Scheme (CIS) HMRC requires companies to keep records for at least three years, or face a fine of up to £3,000 if these records can’t be produced on request.

HMRC could monitor your business

If a company is found to be deliberating avoiding its tax requirements, and hasn’t made a full, unprompted disclosure of a deliberate default, HMRC will instigate the Managing Serious Defaulters programme. This means HMRC will monitor its tax affairs closely for at least the next two years, up to a maximum of five years, and won’t permit the filing of any three-line or abbreviated accounts in this time. If the company fails to show increased compliancy, it could be subject to unannounced visits by tax inspectors, and scrutiny of other business and personal records. A criminal or civil fraud investigation may follow.

Tribunal decisions on self-employment

While employment tribunal decisions are not binding with HMRC, both bodies use the same criteria in defining self-employment. Therefore, if a tribunal decides a contractor should have been treated as an employee, HMRC is likely to hold the same view when it comes to tax. If such a case comes to the attention of HMRC, its policy on recouping unpaid tax and NICs would apply.

Where to go for advice

You can ask your local Status Inspector about the employment status of your workers, and HMRC has its own interactive tool to advise businesses in all but the most complex cases. HMRC may also be able to provide you with a binding opinion of the employment status of your workers.