Ten thousand additional HMRC inspectors are being hired to enforce new rules designed to target ‘disguised businesses’. That’s according to the small-print buried in the post-Budget Finance Bill, and which leaked reports confirm will reinforce Chancellor George Osborne’s determination to end the aggressive tax avoidance of business owners masquerading as employees.
The new rules have taken business owners and accountancy professionals by surprise, as they came into force with only minimal warning near the end of the tax year at midnight on 31 March 2012.
A contract of service is not enough
According to freshly-drafted HMRC guidance which has been leaked to ContractorCalculator, the new HMRC status inspectors are being advised to tear up an employee’s contract of service and create a ‘notional’ contract for services.
ContractorDoctor CEO Dave Chaplin is scathing of the new HMRC approach, saying: “Tax inspectors are being instructed to take drastic action against businesses based on what can be fragmentary and poorly understood evidence that can be interpreted to suit each inspector’s viewpoint.”
“Working faithfully for the same employer for twenty years, being told what to do, how and where, is no longer sufficient evidence to justify an employment contract of service,” Chaplin explains.
He urges those concerned that they may be investigated as a disguised business to always ask, and document, when they can take lunch breaks and holidays. “Keep sending reports to your line manager, telling them what you’ve done, and asking for permission for your proposed approach for the following week,” he adds.
‘In business on your own account’
To avoid being branded by HMRC as being ‘in business on your own account’, and to increase the chances of maintaining ‘part and parcel’ status, Chaplin offers the following advice:
- Never use any of your own equipment. If it can’t be done with what your employer provides, then don’t do it.
- If another organisation offers you work, which you could do at the same time, always refuse – only ever work for one organisation at a time
- Insist on being put on the organisation chart, and get an employee ID card if at all possible
- Organise events like the office Christmas party and baby showers, take on roles like being a fire warden, and always use subsidised facilities, such as canteens and fitness centres.
“Ideally, try to get on any company-paid-for training course, regardless of how unnecessary they are to your actual job,” continues Chaplin. “The more company-focused these are, the more likely it is a status inspector will see it as evidence of you being a genuine employee, and not a disguised business.”
Risk profiles for ‘disguised businesses’
The leaked guidance seen by ContractorCalculator shows that risk profiles for ‘disguised businesses’ will be published in the coming weeks. These are apparently designed to allow tax inspectors and individual employees to ‘self-assess’ employee status. Unfortunately, it seems that the risk criteria to be used is unlikely to be published, except for internal use by the tax authorities.
Whilst it is very early days yet, employment lawyers are already anticipating how they might help defend employees against HMRC charges of them being disguised businesses. Whilst not wishing to be named, one of them offered what she currently believes to be ‘best practice’ answers in response to potential HMRC questions and charges. However, she emphasises that the following are subject to change once the first tribunals and appeals take place within the coming months:
HMRC: “You were off sick and weren’t paid”
Employee: “No I wasn’t, I took a holiday. I’m never ill.”
HMRC: “You are not controlled. Your client doesn’t know how to do this work.”
Employee: “It’s true they don’t, but I check with them daily whether what I’ve done is correct, and they then point me in the right direction as to what to do next.”
HMRC: “You worked at a home office for this client, and rarely went on site.”
Employee: “It’s true, but the client encourages home working. I insisted on working on site, but they wouldn’t allow it.”
HMRC: “You were brought on to complete a project.”
Employee: “That’s true, but I also worked in the post room, did some cleaning, became the fire warden, had a whip-round for Sharon, whose baby is due next month, and organised the Xmas Party!”
Do whatever it takes to avoid being branded a ‘disguised businesses’
ContractorCalculator’s Contractor Doctor has already been responding to requests for advice from concerned employees keen to avoid being branded as disguised businesses by HMRC.
Do whatever it takes to prove that you're a genuine employee. For example, if you're asked to complete a task that is totally unrelated to what you were initially brought in to do, jump at the chance!
Dave Chaplin, ContractorCalculator
He advises: “Do whatever it takes to prove that you’re a genuine employee. For example, if you’re asked to complete a task that is totally unrelated to what you were initially brought in to do, jump at the chance!
“Then make sure there’s a decent ‘paper trail’ you can use as evidence in a future HMRC status inspection. So email your boss afterwards, thanking them for the opportunity, and informing them that you will happily take on any further tasks they might have for you.”
ContractorCalculator will continue to bring you breaking news on HMRC’s new ‘disguised business’ initiative.