The Needs of UK Businesses
In the current economic climate, UK businesses need to adapt and change to enable them to cope with the difficulties brought about by the downturn in the economy. To do this they need the flexibility to engage workers on a sub-contract basis rather than through employment. The ever-increasing burden of employment legislation imposed over recent years has, for many businesses, made employment both extremely onerous and unattractive and made it difficult for businesses to flex their workforce to cope with the demand from their customers. Many business-owners are fearful of taking on employees due to the difficulties associated with dismissing them and the threat of punitive tribunals that invariably follow. As a direct consequence of the employment legislation, employees that are ineffective or not suited to a business’s needs often have to be retained rather than run the risk of legal process that drains businesses of both time and resources that they can ill afford. In light of this, it is only to be expected that many businesses look to self employed sub-contractors to meet their labour requirements.
H M Revenue & Customs does not appear to like self-employed contractors because the amount of tax revenue that is obtained from them is far less than that derived from employees, and the collection of the tax is more expensive than that collected through the cost-efficient PAYE System. HMRC would ideally like to have all workers classified as employees and over the years has actively worked to minimise the use of subcontractors, essentially denying businesses a valuable resource to achieve a situation that it considers to be more desirable.
Status enquiries pose a significant threat to businesses that deploy self employed individuals, and every attempt that is made by them to verify that subcontractors are genuinely self-employed is countered by HMRC moving goal posts in order to thwart them. In the Construction Industry, the extremely onerous Construction Industry Scheme (CIS) has been imposed upon users of sub-contractors that compels them to jump through hoops if they wish to use their services. This regime is enforced by a disproportionate penalty regime that can potentially cost the unwary thousands of pounds in penalties. The Construction Industry Scheme appears to have been designed to increase the problems of using subcontractors and to persuade businesses to use employees as an easier alternative.
As a natural consequence of HMRC’s action against subcontractors, many businesses have turned towards subcontractors that are incorporated in order to avoid status disputes. This has led HMRC to respond by introducing IR35 and legislation aimed at Composite Companies. Whichever way industry turns HMRC seeks a way to counter it in order to get it’s own way. In such an adversarial situation it is inevitable that tax strategies aimed at countering HMRC’s views have come to the fore. HMRC tries to take the moral high ground to decry the evils of “False Self Employment” and the “abuse” of tax legislation to counter their justifiable status claims. However, the tax avoidance phenomenon is essentially one of HMRC’s own making. If HMRC does not want UK businesses to use complex arrangements then it should accept the economic reality that businesses do not want, nor can afford, to employ workers as they would like. If HMRC stopped interfering in how businesses are run, simply to benefit themselves, then business owners could spend less time engaging in tax avoidance strategies and instead focus their efforts on helping to repair the country’s ailing economy.
DEB Can Help
Whilst HMRC continues it’s efforts to manipulate UK working practices, those businesses that use sub-contractors will be constantly under threat. Here at DEB Chartered Accountants we are highly experienced in helping businesses find their way through the complex minefields set by HMRC. We can help you review your employment requirements and formulate the most appropriate way forward, with a view of minimising both the cost and the risk posed by HMRC.
If you feel that your business has status issues or you wish to reduce the cost and risk posed by sub-contract workers, please do not hesitate to contact us.