Reclassifying Subcontractors: A New Hard Line

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 ‘squeezing until the pips squeak’.

When an individual has been reclassified as an employee, HMRC’s practice had been to collect only NI from the employer, provided that the individual had paid income tax on a self employed basis. The NI would include both employer and employee contributions with no deduction for contributions paid by the individual.

HMRC now appear to be seeking a full settlement of the tax as well as the NI. 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 (which they could do by making an error or mistake claim for the last six years) and requesting that HMRC set the tax paid against the PAYE liabilities of the employer.

If employers cannot trace the individuals concerned, they may have to settle the tax in full.

Also HMRC appears to be pursuing all earlier years although the tax paid by the individual more than six years ago will be set off in the settlement because the individual cannot reclaim this.

The effects of reclassification can be serious and can affect any business using self employed individuals. Please talk to us if you have any concerns about this issue.