The proposed changes to HMRC rules governing self-employment and de-facto employee status continues to be both confusing and controversial to many people in many different industry sectors.

History

If you’ve missed the discussion on this subject, to summarise:

  • the government (HMRC) believe that substantial amounts of National Insurance (NI)  revenue contributions are being lost due to individuals and employing companies apparently ‘colluding’ to describe some service providers as self-employed whereas in fact they should be counted as employees; 

This isn’t the first time this has become an issue.  As far back as the 1980s and 1990s, companies employing certain categories of self-employed people stopped doing so when the Inland Revenue of the time started to say it considered the individuals concerned to be effectively employees. This had serious implications for the employing companies in terms of things such as employers’ NI contributions and the need to cover the people concerned by employers’ liability insurance.

The initial rather nervous knee-jerk reaction of employing companies of the period was to insist that any self-employed individuals they were dealing with must be constituted as a limited company.  Even here, problems arose when the IR started implying that the employing companies could potentially, in some circumstances, be held responsible for the limited company’s individuals failing to pay their tax and NI.

This resulted in yet more panic and the refusal of many major organisations to employ one-person limited companies.  Instead, intermediary contracting agencies, both onshore and offshore, were introduced into the relationship in order to try and protect the employing company from the tax office’s potential demands.

New trends

Many people find it moderately depressing to see that 20 or 30 years later, this issue has still not been resolved and HMRC’s new guidelines, which are expected to take effect in April 2014, appear to suggest a much more punitive definition of the de-facto employee.What is worrying many observers is that the new definitions appear to be almost intentionally vague in certain areas and that they could be used to incorporate large numbers of individuals trading as a limited company in the new legislation.

This fear arises because of the fact that not all limited companies necessarily remunerate their directors through dividends.  If they do, the individual concerned may be exempt from incorporation under the new regulations but if not, there is some doubt and ambiguity.

The economy

Of course the real issue here is not the minutiae of HMRC’s definitions but the potential impact this will have on a significant segment of the economy – at a time when economic recovery is apparently taking root but is still very vulnerable to sudden shocks.

The application of new vigorous rules across the market risks potential employers seeing their forecast costs soaring and their risks increasing due to potentially needing to pay both employers’ NI contributions and additional employers’ liability protection cover.This could also be potentially disastrous for some of the existing intermediary agencies who may have long-term supply contracts in place based upon existing cost structure forecasts.

Perhaps the nightmare scenario is of employers doing what they did in the 1990s and simply refusing to use self-employed individuals whether trading as a limited company or not. That would be due to the fear of being relentlessly pursued by HMRC for various contributions.Many reasonable individuals in different industry sectors are saying that this legislation has been rushed and pulled together without sufficient consultation.  Some are campaigning for a delayed application.Developments will be watched with interest.