Safeguard against the costs of a status challenge

Status Challenge

The chances of being subject to a random HMRC inspection are fairly low and so whilst all business should fully consider employment status a considerable number will never have to deal with the consequences of such a challenge. This low level of risk will no doubt increase as HMRC focuses more of their efforts on the construction sector.

For those unlucky ones however it can be stressful and time consuming at best and at worst will end in the closure of the business.

The best starting point is to consider the financial impact. If HMRC can successfully demonstrate the individuals should have been employees of a business they will assess the company for unpaid tax, national insurance, penalties and interest. If the company can show that the individuals have self-assessed and paid their own tax and national insurance this will be offset against the liability but this will still at the very least leave employer’s national insurance to pay.

This prospect doesn’t sound too harrowing at first glance but when you consider that HMRC will be after 13.8% of what you have been paying to self-employed people over the last six years it quickly adds up to huge sums of money.

If for example you had 10 self-employed people working for you earning £600 per week. The Employer’s NI liability will be roughly £60 per week, per person. Multiply this across the 10 workers and over the 6 years and you have a basic liability exceeding £180k. HMRC will of course then look at interest and penalties. Interest can easily add on thousands but it is the penalties which are a bigger problem.

Over the last 10 years HMRC have reviewed their penalties and powers and unsurprisingly increased them. A number of factors will be considered such as whether you told HMRC about the issue without being prompted, whether you were negligent and how well you have co-operated with HMRC. It used to often be the case that HMRC would reduce the penalties to zero if the company agreed to pay the liability. Those days are gone however and a company will typically be looking at penalties of around 30% of the liability. With the above example, this adds an extra £54k to the liability.

This is putting to one side the cost of paying specialists to advice the company, defend the case or represent them in a tribunal.

It is quite easy to see that this type of challenge will usually amount to a liability that companies simply cannot afford. At this point HMRC will not negotiate and unfortunately nor will they care for sob stories about how it will put the business under and people out of work. They will get the money and we have also seen them try to push it onto the business owners personally if they can show fraud or neglect. This doesn’t happen very often but it is something HMRC like to threaten from time to time.