HMRC’s clamp-down on non-compliance will stretch beyond IR35 and soon target the “false self-employment” of sole-traders engaged directly by businesses, according to Seb Maley, CEO at tax advisory firm Qdos.
“IR35 may prove to be just the tip of the iceberg. Status shouldn’t only be a consideration for those engaged in limited companies – there is a real risk for those who engage in sole traders as well.
“I think they [HMRC] are going to be very active over the next couple of years, both on IR35 but also looking at wider status and targeting engagers of flexible workers.”
An individual is deemed an employee if their working practices are significantly controlled by an employer, such as the days and hours they are allowed to work. The individual is then entitled to rights such as a notice period, holiday pay, and redundancy pay.
However, businesses are thought to be circumventing these laws by registering the individual ‘self-employed’. This is referred to as ‘false self-employment’ and allows the client to avoid paying for benefits and National Insurance contributions (NICs).
“There’s nearly five million self-employed people working in the UK – a big proportion of those will be working in a way where status could be a consideration.”
One such case emerged in July 2020 when a freelance hairdresser won the right to claim for employee rights, according to the BBC. A tribunal adjudged that the individual was falsely self-employed due to a lack of control over her contract.
Maley says many businesses may be in breach of the rules unknowingly, and will suffer due to a lack of clarity from government.
“If you’re looking at the issue of sole traders, it’s slightly hard to grasp what the issue is.
“There isn’t a great deal of information about IR35, and HMRC has a responsibility to alert people’s attention to it.”
Darren Fell, CEO at accounting software firm Crunch, offers a similar view. The rules are deliberately vague and complicated in order to catch people out and source tax revenue, he argues.
“They’re making the tax framework so complicated, because it’s easier to go after the people than attacking the big corporations.”
Fell also argues that the current system is “scaring people out of self-employment”, and that it is depriving the UK of a more agile workforce.
But tax lawyer Martin Griffiths refutes these claims, arguing that businesses should know better.
“As a business, if you’re engaging someone directly, I think you’d be pretty aware of the issue,” says Griffiths, who is a partner at UK law firm Addleshaw Goddard.
“The issue of employment status has always been there, and it’s something that you should really be allied to anyway.”
Maley says the onus is on accountants and tax advisors to make the risk of penalty abundantly clear to their clients.
“The onus is on businesses, but those who advise them definitely have a part to play. Accountants need to be very aware that any clients who engage self-employed workers really do need and make sure there’s a level of due diligence that’s taken.